What is PE Ratio: Importance of calculating Price Earnings Ratio | PE Ratio Explained
This video gives you basic details on the PE ratio or price earnings ratio. View the video to get insights on PE ratio basics, importance of calculating PE ratio, analysis of PE ratio in the industry and more. Check out Investology by Edelweiss to learn more about financial ratios - https://www.edelweiss.in/investology/...
What is PE ratio or Price Earnings Ratio?
The Price Earnings Ratio is used to determine the valuation of a company. It is the ratio the current share price of the company to it's per share earnings.
PE Ratio Formula: Market price of share/ Earnings per share
Let us understand PE ratio analysis of companies with an example; Assume stock of company A whose current market share price is INR 100, and over the course of an year has an earning per share of INR 10. So now the PE ratio of the stock will be
100/10 = 10
This means that the investor can regain the capital invested of INR 100 within a span of 10 years.
Similarly, assume stock of company B, belonging to the same sector whose current market share price is INR 100, and over the course of an year has an earning per share of INR 25. So now the PE ratio of the stock will be
100/24 = 4
his means that the investor can regain the capital invested of INR 100 within a span of 4 years. As per this example, it is very clear that, it is wise to invest the stock of a company with a low PE ratio as compared to a high PE ratio. But while doing the PE ratio analysis, it is important to note that the stocks whose Price Earnings Ratio is compared belong to the same industry.
Also a high PE ratio usually means that the value of the company has been overestimated by the investors. While PE ratio is an important factor while choosing stocks to invest in, it shouldn't be the only factor. Investors need factors like dividend yield, promoter holding, historic performance of the stock and so on, into consideration while investing.
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