PE ratio

1-What is the P/E Ratio-

P/e ratio

It is the ratio of the current market price of a stock and earning per share (EPS.) 

P/E Ratio = Share price (CMP.)/ EPS (Earning per Share)

EPS. (Earning per Share)= Profit after Tax / No. of equity share

  • P/E Ratio tells that stock price is overvalued or undervalued compared with the same sector stock or overall sector P/E Ratio. For example, we will always compare Infosys with the P / E ratio of TCS, Tech Mahindra, Wipro, or IT sector not with Reliance or Hindustan Unilever.
  • It does not mean that a low P/E ratio indicates buy the share.
  • What happens to people when they see a low P / E ratio, they buy the stock, which is wrong because sometimes EPS is also low so the P / E ratio of the stock is also low
  • Having an EPS low means that the company’s growth is very slow, so one should never buy the stock given the low P / E ratio
  • We should buy the stock at a low P / E ratio if its EPS is high and fixed for that year but its P / E ratio is reduced by dropping the share price due to any reason. When EPS is fixed, it means that there is no problem in the growth of the company, only the share price is falling due to some reason which will be better in the future
  • If the P / E ratio of a company is 25, it means that we have to invest ₹ 25 to earn one rupee.
  • To see the EPS or PE ratio of a company, go to https://www.screener.in/

for example, we take Reliance industry

CMP is 1114.15 and EPS is 58.18 so P/E ratio is 1114.15/58.18 = 19.15

What is the indication of low P/E Ratio

  • Stock is undervalued
  • Low growth or average growth.
  • Future prospectus not good/great

What is the indication of High P/E Ratio

  • Stock is overvalued
  • High growth rate
  • Great future prospectus

How to check P/E Ratio is the right way

  • P/E ratio to be compared with peers or industry average or overall sector
  • To find why the P/E ratio is high or low
  • To find the Growth is sustainable or temporary

2-What is PEG Ratio

image: www.wallstreetmojo.com

It is also known as Price Earning Growth Ratio

The PEG ratio is a very important contributor to find out the intrinsic value of a company’s stock.

peg ratio is the ratio of share price and growth rate of EPS

PEG Ratio = P/E Ratio / Growth rate of future earning(%) {growth rate of EPS}

Yr.1Yr.2Yr.3
EPS100120150
P/E25

The growth rate between yr.1 and yr.2, is 20% and yr.2 and yr.3, is 25% so we assume growth rate of this company on  Yr.4 = Average  growth rate of Year 1,2 and year 2,3

Average Growth rate =  (20+25)/ 2 = 22.5%  

 So PEG Ratio = P/E Ratio / Average previous year growth rate = 25/22.5= 1.11…………….

What is work of PEG ratio in share market
  • When PEG Ratio more than 1 then it indicates selling opportunity.
  • When PEG Ratio more than 1.5 then it indicates a strong selling opportunity.
  • When PEG Ratio less than 1 it indicates buying opportunity.
  • When PEG Ratio less than 0.5 it indicates a strong buying opportunity. 

3-P/B Ratio

  • It is also called price to book ratio
  • It is  used compared with the share price to book value
  • The ratio of Current share and book value is known as the P/B ratio.
  • It is used to check the quality of assets = Appreciating ( Land, gold, silver) assets or Depreciating assets ( machines)
  • It is used for heavy industry = oil manufacturing, infrastructure, Real estate, 
  • In the software industry, Technology Industry, Service industry, Consulting industry P/B ratio is not used

P/B Ratio = Current share price / Book value

For example, we take the Reliance industry.

Book Value and  Current share is 684.06 and 1114.15

So P/B Ratio = 1114.15/684.05 = 1.0628

  • A stock termed as undervalued if it has a lower P/B ratio. A low P/B ratio indicates a company has some problems with its fundamentals.
  • When a P/B ratio less than 1 it indicates undervalued and when the P/B ratio more than 1 it indicates overvalued.
  • It is especially useful when valuing companies that are composed of mostly liquid assets, such as finance, investment, insurance, and banking sectors.

4-Premium value

Difference of current share price and book value is called premium value

Premium value = current share price – Book value

5-Book value

Book value = Tangible assets – (Intangible assets+Liabilities)

Tangible assets- 

Assets that have physical existance and can be touch and felt are called tangible assets. For example, Cash, Furniture, Plant, Machinery, Vehicles, Building, Equipment, computers, etc.

Intangible assets

 Intangible assets don’t have a physical existence and can not be touch and felt are called intangible assets for example Patents, Logo, customers data, Trademark, Goodwill, Self-development software, Brand value, etc

Now a question should arise in the minds of the people, why do we pay more than the actual share price (book value) of the company while buying shares?

Why the market is ready to pay a premium on book value.

Preception about a future growth company.

6-Face value-

  1. Face value is the original cost of the stock which is decided by a company when it offers share at the time of issue.
  2. Face value is the issue price of share during the issue of the company to the public.
  3. Face value always fixed.
  4. Face value is used to calculate the accounting value of a company’s stock for a company’s balance sheet.
  5. Mostly the face value of an Indian company share is 10.
  6. The dividend is distributed on behalf of face value.

7-Market Value

The current share price is called market value

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