The Soapbox

Joined: 08/13/1998 Posts: 59674
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Hooda, gently, you don't seem to have this correct

EPS = Earnings per Share = Net earnings of the company divided by number of shares outstanding.
A buy back reduces the number of shares outstanding (denominator) and does not change Net earnings (numerator). In a ratio, when the denominator goes down and the numerator stays the same, the ratio increases.
Example: ratio is $100 earnings divided by 1000 shares or 10 cents a share. If shares are cut to 500, then eps goes up to 20 cents a share.

PE = Price divided by EPS. In the example above eps goes up. If the price stays the same, then the PE mathematically goes down....It will only go back up if investors believe that higher eps merits the same pre buy back PE multiple.

But in a free market, what investor will pay for any given forecasted EPS, the PE ratio, is really an expression of confidence in future earnings of the business. With a stock buyback, an investor will say that the outlook for the business has not changed positively, in fact it may be a negative comment about the company's future business opportunities, so why should i pay the same multiple for those earnings.

(In response to this post by Hoodafan)

Posted: 04/16/2019 at 12:41PM

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Umm, your EPS would go down, not up. The denominator stays the same, the -- Hoodafan 04/16/2019 10:30AM

Hooda, gently, you don't seem to have this correct -- 111Balz 04/16/2019 12:41PM

Sorry, meant to say your PE's would go down, not EPS. ** -- Hoodafan 04/16/2019 10:34AM

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