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17 January 2024 5 mins read

P/E Ratio – Price-to-Earning Ratio Explained

17 January 2024 5 mins read
P/E Ratio – Price-to-Earning Ratio Explained

Himachal news
Himachal news

What is P/E Ratio?

Price to earning ratio is a valuation ratio which tells us that “what market value’s the companies stock relative to its earnings”. Basically this metric is used to find out if stock is Overvalued or Undervalued.

How to calculate PE Ratio?

P/E Ratio is calculated by dividing market price per share of a company’s stock by its earnings per share (EPS).


How to use P/E ratio to assess the stock?

P/E is used to find out if stock is overvalued or undervalued.
Best way to assess a stock using P/E value is by comparing it with its peers form same sector. Also one should be cautious about if P/E is high then what is the reason and if it is low then why is it low.

So you should assess overall companies growth in the past and future opportunities for the company.

What does High PE ratio means?

A higher P/E ratio may suggest that investors have higher expectations for future earnings growth.

At the same time it can also be taken as, stock is overvalued (i.e. people are paying more than the intrinsic value).

What does low P/E ratio means?

Lower P/E ratio may indicate lower growth expectations from the stock. Or we can say that a stock is undervalued. There can be many reasons for undervaluation like:

  • No foreseeable growth opportunities. [-ve sign]
  • Industry comparision: A stock with a lower P/E ratio than its peers may be undervalued, but it’s crucial to understand industry norms.
  • Earnings Stability and Growth: Examine the company’s historical earnings stability and growth. A low P/E ratio may be justified if the company has a track record of consistent earnings growth. Conversely, declining or erratic earnings may raise concerns.
  • Future Earnings Outlook: Assess the company’s future earnings prospects. If the low P/E ratio is due to expected earnings growth, it could be a positive sign. Look for factors such as new product launches, expansion into new markets, or cost-cutting initiatives.

Why some comapnies have NO P/E ratio?

If a company has zero profits or it is loosing money then there is no EPS value and  hence no value to put into the denominator of formula.

Is it good if PE ratio is high?

PE ratio determines the market value of a company as compared to its earnings. If PE ratio is quite high then we can say that company is overvalued or its stock price is higher than it should actually be. This perception is based upon the previous data (Earning per share and Stock prices) or Future pridictions if we are calculating PE ratio based upon future EPS (prediction).
So we should not completely rely alon on P/E ratio.

Consider following factors while making your decision based upon P/E ratio:

  • Future Expectations: High P/E generally means that market has high expectations form the company and if it doesn’t meet that, then there are higher chances of price fluctuation
  • Comparision with industry: While comparing P/E ratio always compare it with its peers from same industry (Basically apples with apples). There is no fixed value of High/Low P/E, it varies from industry to industry.
  • Market Conditions and Investor Sentiments: During bulish market investor might be willing to pay higher price as compared to EPS but in bearish market investors might be looking for low P/E. So for a long term investors low P/E ratio could be a good sign.
  • Financial Health of Company: If you think P/E is high but company has great chances of success then you can take a bet on High P/E ratio.
  • Risk Tolerance: High P/E stocks can be very volatile at times. If you have high tolerance to price changes then you can make your decision accordingly.

Is 30 a good PE ratio?

30 P/E is considered high when we compare to historical data. It is assigned to very high growing companies.

Average P/E across various sectors in India

Software 27.91
Oil Refineries & Marketing 21.62
Drugs & Pharma 40.52
Household & Personal Products 58.54
Life Insurance 113.34
Cement 47.72
Misc. Fin.services 18.16
Housing Finance 2.69
Telecom Services 54.28
Hire Purchase 35.39
Tobacco Products 29.96
Electricity Generation 12.79
Auto Ancillaries 54.18
Cars & Multi Utility Vehicles 27.68
Paints & Varnishes 74.32
Real Estate 89.89
Infrastructure 29.24
Finished Steel 26.03
Retailing 101.41
Two & Three Wheelers 30.48
Switching Equipment 69.95
Trading 102.23
Gems, Jewellery & Accessories 73.04
Electricity Distribution 39.61
E-Commerce 50.02
Commercial Vehicles 84.86
Power Projects 120.1
Dairy products 87.27
Non-Ferrous Metal 12.9
Misc.Chem. 79.97
Natural Gas Utilities 47.65
Health Services 70.41
Oil & Gas Exploration 5.62
Food Processing 43.8
Organic Chemicals 55.2
Marine Port Services 31.11
Diversified 36.39
Defence & Aerospace 25.66
Pesticides 39.24
Coal & Lignite 5.03
Tyres & Tubes 40.19
Bakery & Milling Prod. 52.78
Vegetable oils 68.72
Plastic Tubes & Pipes 68.64
General Insurance 37.85
SIDCs/SFCs 3.74
Aluminium 8.09
Ball Bearings 53.48
Electrical Machinery 44.75
Construction -93.12
Investment Services 19.26
Hotels 61
Air Transport -31.7
Steel Tubes & Pipes 33.49
Communication Equipment -20.1
Equipment Leasing 19.13
Sponge Iron -0.68
Electronic Equipment 15.53
Liquors 53.12
Restaurants 73.19
Wires & cables 32.11
Electronic Components 99.83
Footwear 90.44
Asset Management Companies 26.01
Industrial Machinery 82.4
ACs & Refrigerators 95.67
Media & Entertainment 59.68
Logistics 31.9
Kitchenware & Appliances 0.37
Travel & Tourism 93.53
Castings & Forgings -282.58
Diesel Engines 42.17
Other Fertilisers 26.19
Cotton & Blended Yarn 22.77
Inorganic Chem. 15.35
Readymade Garments 51.73
Packaging & Containers 39.18
Courier Services -1.5
Minerals 191.65
Abrasives 61.75
Sugar -10.47
Misc.Other Services 21.98
Brokerage Services 16.81
DFIs 5.18
Pumps & Compressors 51.23
Soyabean Prod. 735.25
Textile Processing 75.27
Beer 124.55
Other Machinery 44.24
Indl.Gases 88.89
Ceramic tiles 53.16
Ship Building 24.29
Nitrogenous Fertilizer. 6.79
Cloth 47.21
Explosives 44.43
Other Metal Products 129
Stainless Steel 13.76
Credit Ratings & Information 45.85
Diagnostics Services 64.47
Storage Batteries 23.72
Refractories 28.55
Reinsurance 5.33
Dyes & Pigments 38.48
Soda Ash 9.93
Glass & Glassware 49.58
Wood 33.69
Paper 14.77
Leisure & Recreation -4.78
Other Agriculture Products 12.62
Tractors & Farm Machinery 35.96
Fasteners 48.97
Business Services 32.28
Tea & Coffee 123.64
Synthetic Yarn 21.87
Lubricants & Grease 12.84
Exchange Services 45.36
Speciality Chemicals 39.14
Shipping 7.15
Misc.Textiles 40.77
Textile Machinery 35.78
Medical Devices & Equipment 50.82
Transformers 50.29
Thermoplastics 30.97
Steel Wires 30.95
Other Plastic Products 93.32
Caustic Soda 9.95
Home Furnishings 31.22
Carbon Black 19.34
Chemical Machinery 30.76
Cement & Asbestos Products 20.36
Books & Newspapers 12.36
Other Forms-Primary Plastic 11.32
Pig Iron 22.28
Oil Cakes & Animal Feed 28.85
Commercial Complexes 20.9
Rubber & Rubber Products 23.71
Welding machinery 48.48
Other Projects 44.6
Motors & generators -47.74
Business Consultancy 28.09
Machine Tools 48
Aquaculture 19.01
Other Vehicles 104.07
Road Transport 17.66
BPO Services 30.77
Ferro Alloys 5.17
Storage & Distribn. 19.64
Plastic Resins 41.05
Structurals 14.9
Others 76.1
Clocks & Watches 39.31
Granite & Stones 25.4
Education 297.98
Other Financial Instututions -91.01
Dry Cells 80.77
Poultry & meat prod. 33.97
Plastic Films 11.62
Misc. Manuf.Articles 37.5
Crude Oil & Natural Gas 47.18
Computer Hardware 45.7
Oil & Gas Equipment & Services 7.4
Non-Metallic mineral prod. 43.2
Phosphatic Fertilisers 13.75
Offshore Drilling 10.86
Jute prod. 12.62
Chemical Extraction 20.72
Marine Foods -41.15
Edible Oil 4.54
Synthetic Fabrics 19.76
Leather Products 21.8
Aluminium Prod. 8.18

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