Importance of p/e ratio

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Anil Sankar V

1877 Points Joined November 2008

Price to Earning (P/E) ratio = price (per share) ÷ earnings (per share).

Low P/E ratio indicates that the stock is undervalued (or the company is failing).

Consider the example, if a company’s share price is 200 Rs and its earning per share is Rs 20 in last 12 month. Its P/E ratio will be 200 ÷ 20 = 10.

The P/E ratio answers the question “Am I paying too much for the company’s earnings?”

Some points to remember:

1. Don’t invest in those company’s share which is having much higher value of Price to Earning (P/E) ratio compared to other stocks in same category because it indicates that current price of the share is overvalued, price of that stock have more chances to fall in future.

2. Don’t invest in those company’s share with no price to earning value. No P/E value means that the company is in loss.

Replies (8)

CS,CA F,Numrologi TusharSampat

CS CA F Numerologist Astrologer Graph

85935 Points Joined May 2010

THANKS FOR SHARING...

CA Deepesh Ruhela

Keen to Learn

3271 Points Joined August 2010

thanks for sharing...

Ashwani Narnoli

1843 Points Joined July 2009

thank you for this.......

Akanksha Jain

Article

690 Points Joined July 2011

Simply saying if P/E Ratio = 20

It means to earn Re 1 we have to invest Rs. 20 in that company.

CA Lokesh Pokharna

CA (Ahmedabad Bhilwara Chittorgarh)

4128 Points Joined November 2009

Various dimentions of PE ration are

1- No. of times payment made for per unit of earning

2- investors will recover his investment value in that much time. e.g pe ratio is 20 , that means payback period is 20 years ignoring price appreciation & dividents..

3- lower of the ration , higher the return on investment e.g pe ration20 means roi will be 1/.2= 5% & pe ration 5 then roi will be 1/.05= 20%

4- modern tecnique is Trailing eps & future eps (adjusted with growth rates)...

CA Lokesh Pokharna

CA (Ahmedabad Bhilwara Chittorgarh)

4128 Points Joined November 2009

Modern valuation ratio is PEG ratio,, PE ration is old story now.........

$\mbox{PEG Ratio} \,=\,\frac{\mbox{Price/Earnings}}{\mbox{Annual EPS Growth}}$

The growth rate is expressed as a percentage above 100%, and should use real growth only, to correct for inflation. E.g. if a company is growing at 30% a year, and has a P/E of 30, it would have a PEG of 1.

A lower ratio is "better" (cheaper) and a higher ratio is "worse" (expensive)

CA Tripurari Kumar Thakur

Accounts Excutives

144 Points Joined January 2013

super discribed by u ..dear lokesh sir...

Vaibhav Kumar Agrawal

Service

176 Points Joined July 2012

pe ratio simply indicates the fundamentals of the company. If a company has a pe ratio of 20 we can say that the market is ready to pay 20 times the earnings of the company(this is due to the strong fundamentals) whereas if a compay has pe ratio of 2 then it has poor fundamentals...we cannot exactly use pe ratio for checking valuation i.e under valued or over valued...