Skip to main content

PE ratio and Its analysis

 Introduction:- 

PE ratio also known as Price to Earning ratio and is the most popular ratio among the investors. They use this to identify undervalued or overvalued stocks. By using it investors enhance the area of margin of safety and secure their investment.
How to calculate PE ratio?
PE ratio = market value per share / EPS(earning per share)

Examples of calculation

  • Assume:-
    Market value per share = 40
    EPS (earning per share) = 12
    PE ratio = 40/12 = 3.5
  • Market value per share = 40
    Earning per share = 5
    PE ratio = 40/5 = 8


How to use it? Or PE ratio using tips:-

  • Lower PE ratio is better than higher PE ratio for selection of stock because low PE mean high earning per share and high PE mean low earning per share. And we need high earning per share.
  • Stock/share’s PE ratio compare with other same industry’s PE ratio. If both companies market cap nearly same then better to compare.
  • Compare Company’s PE ratio with nifty and sensex PE ratio. First:- take the average of 10 years PE ratio of both nifty and sensex then compare it with your company.

Reasons of high PE ratio:-

  • Low EPS (earning per share)
  • Market value of share is too high comparing to its intrinsic value. It means, sharp decline may occur in near future because high price will not sustain for long duration.
    Mean:- Overvalued stock.

Reasons of low PE ratio:-

  • High EPS (earning per share), it is good for investment.
  • Market value of share is too low comparing to its intrinsic value. It means, upward trend may occur in near future, when market recognize share’s real value.
    Mean:- Undervalued stock.

Limits of PE ratio:-

  • Only on the basis of low PE ratio never invest in any company, what is reason behind it always check. Use it with other ratios like debt to equity, EV/EBITDA etc.

"GOOD LUCK"
Labels:

Comments

Post a Comment

Please do not enter any spam link in the comment box.

Popular posts from this blog

My Investments and Returns: April 2024 - March 2025

  My Investments and Returns: April 2024 - March 2025 The Ground Rules Alright, folks, I’ve borrowed some of Warren Buffett’s genius ground rules from his famous letters—like borrowing your rich uncle’s best suit! I’m serving his wisdom with a sprinkle of my own goofy charm. Why? Because if you’re going to copy, go for the guy who buys companies like I buy snacks! Get ready for simple, Buffett-style tips that’ll make you feel like a money wizard—or at least fool your friends into thinking you are. Joke’s on them when you start sounding smarter than a stock market squirrel! Let’s roll! When we talk about yearly gains or losses, we mean market values—how our assets are valued at year-end compared to the start of the year. This may have little to do with realized results for tax purposes in a given year. Whether we do a good or poor job isn’t measured by whether we’re up or down for the year. Instead, it’s measured against the general performance of securities, like the S&P BSE Se...
Post a Comment
Read more

10 common mistakes in the share market by beginners

  10 common mistakes in the share market by beginners:- Mistakes? way of learning. Always learn from your mistakes, take a responsibility of own mistakes and try to avoid it, it shows high morals of man. But in share market, one thing always keep in your mind that mistakes in share market never be forgiven. So it never be good to commit any error, always try to learn from others. Maybe after your own mistakes, you would not able to stand again. There are 10 very common mistakes in the share market by the beginners:- 1. Looking on stock market as a tool of making quick money:- Beginners enter in the share market with the mindset that “ share market is gambling and they can make quick money here ” it’s wrong mindset. They mix Gambling with share market that is not right and it dishonor the share market and create bad reputation on others mind. In the gambling you put your money in bets but in share market you invest on companies. And with some basic knowledge you will never lose. So ...
Post a Comment
Read more

Stock Market Amid Indo-Pak Tension

  Stock Market Amid Indo-Pak Tension On April 22, 2025, a devastating terrorist attack struck the Pahalgam region of India, claiming 26 lives. The brutality of the assault, where attackers interrogated victims about their religion—demanding Hindu or Muslim identification, forcing men to disrobe for verification, or compelling them to recite the Kalma—shocked the nation. Failure to comply resulted in execution in front of families. This heinous act not only broke the nation's heart but also fueled widespread anger, as it was clearly designed to sow hatred between communities. Such attacks demand a resolute response. I believe India must take decisive and robust measures to send an unequivocal message to perpetrators: India is a strong, modern nation that will leave no stone unturned to protect its citizens. By demonstrating unwavering resolve, India can deter future acts of terror and reaffirm its commitment to national security. How to Invest in War-Like Situations War-like situati...
Post a Comment
Read more