PE RATIO

 WHAT IS PE RATIO IN STOCK MARKET

The PE ratio is commonly used for stock selection, whether it is suitable to buy or not. The PE ratio as certain the value of a company based on the current stock value per share for every rupee of its future earning. PE ratio helps to understand company's worth presently and future growth anticipated based on how its share prices are relative to its earning per share.

It is a important tool for the investors for stock evaluation. If a PE ratio is high, it means that the stock is overvalued and take the decision not to buy that particular stock. If PE ratio is low, investors takes the decision to buy it due to it cheap price.

 P/E Ratio Formula

P/E Ratio = (Current Market Price of a Share / Earnings per Share) 

Price to Earnings Ratio is one of the most widely-accepted metrics by analysts and investors across the world. It signifies the amount of money an investor is willing to invest in a single share of a company for Re. 1 of its earnings. For example, if a company has a P/E Ratio of 20, investors are willing to pay Rs. 20 in its stocks for Re. 1 of their current earnings. Hence, when a company demonstrates high P/E Ratio, it means that either the company is overvalued or is on a path to growth. Another interpretation of a high P/E ratio could be that having high P/E ratio company is expected to grow in the future.

On the other hand, a low P/E Ratio indicates undervaluation of stocks. On other hand another interpretation of a low P/E ratio is that it indicates that a company could perform poorly in the future.

Types of Price to Earnings Ratio

There are mainly two types of P/E Ratio which investors take into consideration – forward P/E ratio and trailing P/E ratio. Both these types of P/E Ratio depend on the nature of earnings, as as follows

(a)Forward P/E Ratio

It is calculated by dividing the prices of a single unit of stock of a company and the estimated earnings based on future earnings guidance given by the company. This  ratio is depends on the future earnings of a company and it is also known as an estimated P/E Ratio. 

Investors use forward Price to Earnings Ratio to assess the expected growth of the company in the future estimated growth.

(b)Trailing P/E Ratio

Trailing P/E Ratio is the most commonly used tool by investors to asses past earnings of a company over a period of time is considered. It provides a more accurate  view of a company’s performance and its future growth.

Note. It is advised to before investing in stocks, investor should consult to their investment advisor.