P.E Ratio -  PRICE / EARNING

PE Ratio

There are several parameter studied under FUNDAMENTAL Analysis.

And PE Ratio is one of the most important parameter among them.

As we heard several times "FIRST IMPRESSION IS THE LAST IMPRESSION", same way PE Ratio of any stock is the first impression as the Stock is Costly or Cheap.

Actually the matter of PE is very subjective. As lot of confusion as Low PE is good or  High PE is good. But the thing is not like that. we see later on. 

First understand What is PE or P/E Ratio?

P represent the PRICE and E represent the Earning ( EPS - Earning per share ). And the formula is
P.E = Price / Earning it is a ratio and hence having no unit.

Suppose Price of Stock A is Rs.100 and Earning is Rs.10 then
,P.E = 100 /10 = 10

Suppose Price of Stock B is Rs.100 and Earning is Rs.5 then
P.E - 100/ 5 = 20

What it indicate? Stock P.E  is 10 or 20.

Here in this picture it is clearly visible that the Stock A earning is Rs.10 and Price Rs.100,
while the Stock B earning is Rs.5 and Price is Rs.100. 

That indicates that Stock A earning is Rs.10 and people willing to pay Rs.100 for that Rs.10 earning and for Stock B earning is Rs.5 and still people willing to pay Rs.100 to stock.

Ignoring other parameter from first look it is clear that even for less earning of Stock B i.e Rs.5 people are pay Rs.100 as compare to Stock A earning Rs.10.

In simple language people are ready to Pay Rs.100 for Stock A Rs.10 one yr earning and similar way people are ready to Pay Rs.100 for Stock B Rs.5 one yr earning.

Hence for this time Stock A is cheaper than Stock B.

And one important to be kept in mind that PE Ratio comparison is a Apple to Apple comparison. I mean to say that  Automobile stock to be compared with Automobile stock, Pharma stock with Pharma stock like that. PE Comparison to be done within sector only. Automobile stock PE not to be compared with  Pharma stock PE. Next further we will learn about what is good P.E.

Disclaimer : This article is only for knowledge and information sharing and not for any type of recommendation.