11/20/2018 What is PE Ratio | PE Ratio Formula, Interpretation & Analysis | Samco

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11/20/2018 What is PE Ratio | PE Ratio Formula, Interpretation & Analysis | Samco

What is P/E Ratio? How interpret and analyse the PE

Ratio?
Popular Articles
Created September 7, 2016 | Author Sharang Lele |
Category Investing, Help on Investing & Trading | Comments 23
 List of 30
Highest
Dividend
P/E Ratio – The De nition Paying Stocks
in India

P/E Ratio or PE Ratio as they are commonly referred to stand for the Price to
 List of Below
Earnings Ratio of a company.
10 Rupees
Shares, Traded
In simple terms it helps an investor calculate the price multiple that investors on NSE
are willing to pay for a company’s earnings.
 What is SEBI or
PE Ratio Formula Securities
Exchange
board of India?
P/E Ratio of a Stock = Current Market Price of the stock/Earnings per share

 List of Penny
The current market price of the stock can be obtained from the stock exchanges Stocks in BSE
where the stock is listed. India

The Earnings per share used in the denominator can be of 2 kinds  Why Suzlon
Share Price is
Going down
Trailing EPS used to calculate trailing P/E multiple – The actual reported
earning per share of the company for the immediately preceding
 List of Stock
nancial year i.e. for 12 months trailing. You can nd the trailing PE ratio Exchanges in
of the company from the SAMCO Data Bank available in the SAMCO India 2018
Back Of ce – SAMCO STAR.
Forward EPS used to calculate forward P/E multiple – The  National Stock
forecasted earning per share of the company for the next Exchange of
India
immediate  nancial year i.e. for 12 months forward

When the price of a stock is INR 20 and the EPS is INR 2, PE works out to 10.
The price-earnings ratio tells that the investor willing to pay INR 20 for earning
Recent Articles
INR 2.

 HUL: Find Full

PE Ratio Interpretation Form, Pro le,
Latest Revenue
In value investing, ‘value is what you get and price is what you pay.’ Value is and Financials
nothing but the differential between current price and fair value of the stock. Details

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11/20/2018 What is PE Ratio | PE Ratio Formula, Interpretation & Analysis | Samco

In fundamental analysis, to derive at fair value analysts use various methods  RITES Limited :
and ratios. P/E is one of the most important and interesting ratios used to Full Form,
Pro le, Latest
compare the price and value of a particular stock.
Revenue and
Financials
Usually higher the P/E ratio, the more premium is the stock and vice versa. A Details
high P/E ratio doesn’t necessarily mean that a stock is expensive and should be
sold. It simply means that investors are willing to pay a premium to hold the  How to Invest
stock. This premium may be due to a variety of factors. in a Mutual
Fund Online &
Of ine
In simple terms, its a valuation tool used to determine whether the stock is
being traded at the Exchange at a premium or a discount to the worth of the
 Sun Pharma:
underlying value of the business. Full Form,
Pro le, Latest
PE Ratio Analysis Revenue and
Financials
There are multiple reasons why a particular stock could be trading at a low PE Details
multiple or a high PE multiple.
 HDFC Bank :
Find Full Form,
Factors that could contribute to a High P/E multiple include but are not limited
Pro le, Latest
to Revenue and
Financials
Superior Growth potential of the company Details
Stable and Visible pro tability of the company
 SAMCO Policy
Superior Corporate Governance practices of a company
for Physical
Monopolistic nature of the business and industry leadership
Settlement of
Ef cient business models with ef cient utilisation of assets F&O Contracts

Factors that could contribute to a Low P/E multiple include but are not limited  Aadhaar Goes
to Virtual – How
to generate and
Lack of visibility of earnings of a company use your own
Aadhaar Virtual
Poor corporate governance practices and lack of management credibility
ID (VID)
Low growth potential or de-growth prospects of the company

While an investor conducts PE analysis and tries to determine if a company is

cheap or expensive, the following questions must be asked

Is the PE Ratio of the company similar to its industry peers i.e. compare
the stock’s P/E and industry PE?
Is the PE Ratio of the company in a range as compared to its own historic
PE Ratio i.e compare the stock’s P/E and its own historical PE?

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11/20/2018 What is PE Ratio | PE Ratio Formula, Interpretation & Analysis | Samco

Is the PE Ratio of the company similar to its global peers i.e. stock’s PE in

comparison to global industry peers?

Usually a stock’s PE ratio should move in line with its own industry and global
peers. It also usually moves in a rangebound fashion to its own historic PE
multiples. Any major divergence from these should require additional
investigation on why is there a divergence in the PE ratio from the
above. Investors should be able to explain/justify this divergence and
subsequently take an investment call.

PE Ratio by Industry

Similar to the PE Ratio for a stock, an investor should also evaluate the PE Ratio
of the Industry.

PE Ratio by Industry = Current Market price of the Sectoral Index/Weighted

Average Earnings per share of the stocks comprising of the index.

As explained above, once the  PE ratio of the industry is computed and

calculated, it should be compared with the PE ratios of the individual stocks of
the same industry. This can act as a great reference point to interpret the
premium or discount of a particular stock.

While the PE Ratio works as for analysis across various industries, however
there are certain sectors where the PE has limited application and other
valuation methods are preferred over the PE Ratio.

For Instance

Banking – P/B Ratio is preferred over the P/E Ratio

Manufacturing/Commodity and Asset Heavy Businesses – EV/EBITDA is
used in combination with the P/E Ratio
Holding Companies – Net Asset Value basis

Concluding thoughts

In the purest form, the true value of a company is the sum of the discounted
present values of all future cash ows. This is often computed using the
Discounted Cash Flow method which is extremely dif cult and cumbersome.
The PE Ratio is an extremely simpli ed valuation methodology. While the PE
Ratio is widely used for its simplicity, it cannot be relied upon as the only
valuation methodology. It must be used in combination with other valuation

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11/20/2018 What is PE Ratio | PE Ratio Formula, Interpretation & Analysis | Samco

methodologies to arrive at more accurate and conclusive valuation in the

process of fundamental analysis.

Tagged: # PE Ratio Formula # PE Ratio interpretation

# Price to Earnings Ratio # SAMCO Data Bank # PE Ratio by Industry

# PE ratio analysis # P/E multiple # P/E Ratio De nition # PE Ratio

Related Articles

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11/20/2018 What is PE Ratio | PE Ratio Formula, Interpretation & Analysis | Samco

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