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 growth of the company.
  • P/E Ratio below 15 is generally considered lower. Lower P/E Ratio indicates lower valuation or price and slow growth of the company.
  • Higher P/E Ratio may  indicate investors' vote of confidence and expectation on specific shares. 
  • Lower P/E Ratio may  indicate investors' vote of no-confidence on specific shares. This may also happen due to overlooking of shares by investors.
  • Limitation of P/E Ratio : Highet P/E Ratio is not always good for handsome return. Lower PE Ratio is not always bad for good return. Hence, investors should check other important parameters while choosing shares for investment.



Happy Investing !!!
 প্রদীপ




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Comments

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