P/E Ratio and Evaluation of share !
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Price to Earning (P/E) Ratio Suppose price of each Share of one Automobile Company PQR is Rs.500/- and that of another Automobile Company UVW is Rs.5000/-. Now, if you consider the share of UVW is overpriced than PQR just because of higher share price, you may be proved absolutely wrong. P/E Ratio is one of the important parameters to check and compare the proper valuation of stocks belonging to same sector. What is P/E Ratio? It is the ratio of current Share Price of one company and its Earning Per Share in last 12 months. Physical Significance of P/E Ratio: Suppose the P/E ratio of company PQR is 20 i.e. the investor will pay Rs.20/- for earning of Rs.1/- per share. Again consider the P/E Ratio of company UVW is 10 i.e. the investor will pay Rs.10/- for earning of Rs.1/- per share. So, share of PQR is overpriced and that of UVW is underpriced. P/E Ratio above 20 is generally considered higher. Higher P/E Ratio indicates higher valuation or price and fast growt