In event of a stock split, I understand both price and earnings will decrease by the same amount.

Therefore, there will be no effect on the PE ratio.

However, I can’t seem to understand how a company’s earnings will be affected by a stock split. Why shouldn’t the earnings remain the same?

Appreciate anyone’s input on this. Thanks!

dwheats
November 21, 2014, 12:46am
#2
P/E = price per share / earnings per share

You have # shares in the numerator and denominator so it cancels out.

Another way of looking at the P/E ratio is to multiply the numerator and denominator by # shares, then

P/E = market cap / net income

shares outstnading will not have an effect on either, so the P/E is constant.

but how will the denominator - earnings be affected by a stock split?

MrSmart
November 21, 2014, 11:49am
#4
It won’t.

The P/E ratio is the total market cap divided by total earnings for the period. Both are unchanged by stock splits or reverse splits. The number of shares outstanding is irrelevant here.

Ok, because I read that the PE ratio will not change because both the P and E will both decrease.

Unlike what you mentioned - no change to both.

thanks for the clarification guys!

dwheats
November 21, 2014, 4:08pm
#6

sonikmook:

Ok, because I read that the PE ratio will not change because both the P and E will both decrease.

Unlike what you mentioned - no change to both.

thanks for the clarification guys!

P and E will both change.

But that is Price Per Share and Earnings Per Share.

Since they are both on a per share basis, the effect of a stock split is cancelled out when evaluating the P/E ratio.