PE Raito :A Useful Ratio in investing
In stock market there are many listed companies and many type of shares, but big question is how to find or select a good companies in very big sea like market then we used some financial ratios to know about company current condition. we find many financial key ratios , in them PE Ratio is very important ratio. PE means P = price E = earning means price to earning ratio. it calculated like this PE Ratio = per share CMV ( current market )value/eps ( earning per share ),
EPS is also a financial ratio showing earning per share
In normal terms when we see any company with high PE ratio we aspect high growth in future from company and if it ruling with low PE aspect low future growth but in all terms it is not a full valuation if industry PE is higher then our target company so in compare target company with peer company, target company looking good other then peer group, if industry PE is ruling with low PE in compare to our target company so target company looking very expensive. In general rule investment in high PE company like above 24PE is looking very risky and lower then 10PE is also risky because above 24PE company looking very expensive, trading higher without response like earning future, good management, cash flow and lower then ten is showing low earning , temporary earning, low earning activity.company that are loosing his business and money and making loss have negative PE or zero PE. this type company is not good for investment or handsome returns.
example: assume a company market price trading on 200 rs and last 12monts earning per per ruling on 10 rs so divide 200 by 10=20 means company have PE of 20 means looking good for invest here, but here is a problem PE showing many condition but not all condition before investment you need to look many factors . PE have no meaning in front of famous, big, powerful pricing power, cash generator , big brands company like ITC ,HUL,Cipla, etc
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