Click here to view 💥POST 1💥 EPS
💥POST 2💥 P/E Ratio
This is the most important ratio used to value shares. It is also called as PRICE TO EARNING ratio.
In our previous post we learned about EPS which is nothing but how much the company is earning per share or the profits per share.
Now lets assume there are 2 companies A & B from same sector and we have to buy any one company for investment purpose.
Company A
Share price- 1200
EPS- 150
Company B
Share price- 40
EPS-2
In this case, company A looks expensive and company B looks cheap(price wise), to a person who has no knowledge about fundamentals.
But is it correct? No
Rs. 1200 share has Rs. 150 earnings. Remember that 150 is earning per share(EPS) and 1200 is cost of 1 share
(1200÷150)
(1200÷150)
So the share in case of company A is priced at 8 times its earnings(or 8 time multiples).It means we are paying 8 times of its earning per share to buy company A.
Now this multiple is called as Price to Earning or PE is nothing but
-----------------------------------
Share price ÷ EPS
-----------------------------------
This is the formula
Whereas Company B's share price is 40 and EPS is just Rs. 2. It means that it is quoting at 20 times its earnings (40÷2). We are paying 20 times of its earning per share to buy the share.
So which is better Company A or Company B keeping all other things equal? A Rs. 1200 share having 150 EPS or a Rs. 40 share having 2 EPS. It is obvious that anyone will prefer the Rs 1200 share (Company A).
This is because in case of company A, I am paying Rs. 8 for every Rs. 1 of earning and in case of company B I am paying Rs. 20 for every Re. 1 of earning.
This is because in case of company A, I am paying Rs. 8 for every Rs. 1 of earning and in case of company B I am paying Rs. 20 for every Re. 1 of earning.
See P/E is nothing but a multiple at which share price quotes over earnings..
For example if
Price is 100 and EPS is 20 then share is quoting at 5 times its earnings.
Price is 78 and Eps is 6 then share is quoting at 13 times of its earnings. So P/E is 13.
Now the PE which we calculated is called as Trailing PE or the CURRENT PE. All the financial sites will always show you trailing PE or the current PE of the stock.
PE is a very very vast topic so we will have atleast 8 to 10 posts on it so just hold your horses before coming to a conclusion.
Written by - Yash
Edited by - #Raj
Raj Vora. Raj is studying BBA currently and is very passionate to learn different aspects of Stock Markets. He prefer to tag all his post as #ow.
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