Through the P/E looking glass
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Price Earning Ratio
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Price Earning Ratio
• P/E is a measuring parameter or a benchmark tool used to decide whether any stock is investment worthy
• The Price to Earnings multiple (popularly termed as the ‘P/E’) is academically read as ‘market price per share divided by the EPS (i.e. the Earnings Per Share)
• It indicates the value that the market is willing to pay for the potential of growth embedded in a stock with respect to the company’s earnings and denotes the premium offered by the market to value the company
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What are the benefits of P/E ratio?
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What are the benefits of P/E ratio?
• Primarily, the P/E helps you to understand if a particular company is over-priced or under-priced vis-à-vis its peers
• A stock with a lower P/E vis-à-vis its industry P/E is considered ‘undervalued’
• A stock with a higher P/E vis-à-vis its industry P/E indicates that it is more popular and has better and sustainable earnings growth potential vis-à-vis the others
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How do you calculate P/E?
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How do you calculate P/E?
• There are two methods of calculating the P/E. This is because you can either use the Trailing Twelve Month (TTM) EPS or you can consider the Future Twelve Month EPS
• For example :if the current market price of Company X is Rs 150 and its TTM EPS is Rs 6, its P/E will be 25 (Rs 150/ Rs 6). For the same company, if the future twelve month EPS is Rs 8, the forward P/E will be 18.75
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What is the difference between
TTM EPS and 12 month EPS?
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What is the difference between TTM EPS and 12 month EPS?
• It is advisable to use the TTM EPS as it is based on past data and provides more certainty against using the future 12 month EPS since it just provides earnings visibility
• However, in case the company is an emerging company positioned in a high growth industry and having robust expansion plans over the future years, using the future twelve month EPS is more advisable
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Remember: It is not necessary that stocks with a lower P/E is always undervalued and stocks commanding higher P/E are
the best stocks
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Registered office: Kotak Securities Limited, 1st Floor, Bakhtawar, 229, Nariman Point, Mumbai - 400021. SEBI Registration No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230/INE 011207251, OTC INB 200808136, MCXSX INE 260808130.
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