Show me how to read and understand the PE ratio of stock?

General
2

Go through this http://zerodha.com/varsity/.

You can find about P/E in fundamental analysis.

3

The PE ratio is defined as the ratio of Market Value per Share to Earnings per Share. It is widely used to find quality bargains in current stock prices.

For e.g. you may find the same quality drink at different prices in different places or a particular vegetable being sold at different rates at different vendors, PE plays a role similar to determining the most profitable stocks for investment.

For, e.g., let us consider two companies operating in the same sector, company A and company B. Say, company A has a PE of 27 while B has that of 39. In the considered case, A is a better buy as it has a lower PE.

A low PE implies that market price has not increased much while a high PE would be a representative of higher growth prospects.

It is necessary and helpful to read and understand the PE ratio of the stock as a high PE ratio would mean an over-priced stock while low PE ratio is representative of unknown market growth potential and hence such stocks make a good bargain.

If a stock is over-priced, i.e. price is much higher than its actual growth potential; such stocks are more liable to a drastic fall. Hence PE ratio is a very useful tool you can employ to decide in investing/buying a stock at lower prices after comparing the ratio for a number of companies working in the same sector.

Also, the interpretation is sector dependent on a ratio considered high in one sector may be considered very low in others.

4
 

So today I would be covering the importance of PE ratio. What this term means? How it comes in handy while investing in a particular stock and security.

1)      Earnings – Historical, Trailing and Forward             

		<p>Earnings are profits in a business. Earnings can be defined at various levels. For example, net profits are the profits available to the equity owners. Earnings before Interest and Taxes (EBIT) are available to serve both equity and debt holders. Earnings before Depreciation Interest Taxes and Amortization (EBDITA) is the earning available to a business to replace its assets over a period of time and to serve both equity and debt holders. Earnings of previous years are called historical earnings.<br>
		Trailing, earnings refer to the earnings of the latest four quarters, calculated on a rolling basis. Earnings computed based on future projections are called forward earnings.&nbsp;</p>

		<p><strong>2)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</strong><strong>Earnings Per Share (EPS)</strong></p>

		<p>Net profits of the company belong to the shareholders. Earnings per share is the net profit divided by the number of shares. It indicates the amount of profit that company has earned, for every share it has issued.</p>

		<p>EPS is calculated as:&nbsp;<br>
		EPS = Net Profit/ Number of shares outstanding</p>

		<p>For a company with Net Profit of Rs. 10 Lakh and outstanding shares 2 Lakh, the EPS would be Rs. 5 (Rs. 10 Lakh/ 2 Lakh).</p>

		<p>A higher EPS shows higher profitability and better earnings for the shareholders and will be preferred over shares of companies with lower EPS. EPS is a significant variable in determining a share's price.</p>

		<p><strong>3)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</strong><strong>Dividend Per Share (DPS)</strong></p>

		<p>Dividend is generally declared as a percentage of the face value of the shares. It is the portion of profit which the company distributes amongst its shareholders. For example, 40% dividend declared by company will translate into a dividend of Rs. 4 per share with a face value of Rs 10 (10*40% = 4). This is known as Dividend Per Share (DPS).</p>

		<p><strong>4)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</strong><strong>Price to Earnings Ratio (PE Ratio)</strong></p>

		<p>Price to Earnings Ratio or the PE Ratio measures the price that the market is willing to pay for the earnings of a company. It is computed as:</p>

		<p><strong>Market price per share/Earnings per share</strong></p>

		<p>PE is referred as a multiple of per rupee of earnings. When one refers to a stock trading at PE multiple of 12x, it means the stock is trading at twelve times its earnings. The PE multiple based on historical earnings is of limited value. The prices change dynamically, while the reported earning is updated every quarter. Therefore, prices tend to move even after the historical earning per share is known, in anticipation of the future earnings.</p>

		<p>If it is expected that earnings of a firm will grow, then the market will be willing to pay a higher multiple per rupee of earning. The focus is, therefore, on ‘prospective’ PE or how much the current price is discounting the future earnings. For example, when analysts say that shares of XYZ company is trading at 20 times its 2014 earnings, but is still about 15 times the 2015 earnings, given the state of its order book. What they are saying is that the growth in EPS is likely to be high, and therefore the current high PE based on historical numbers may not be the right one to look at.</p>

		<p>Most publications and reports show the PE using historical earning numbers from the latest quarterly reports. Analysts’ estimates of future earnings are not widely available and they may vary. Some publications report ‘consensus’ view of prospective earnings.</p>

		<p>It is common to look at the PE multiple of the index to gauge if the market is overvalued or undervalued. The PE multiple moves high when prices run ahead of the earnings numbers and the market is willing to pay more and more per rupee of earnings. When markets correct and uncertainty about future earnings increases, the PE multiple also drops. A value investor, who would like to pick up stocks when they are cheap, may be interested to purchase when PE is low. Analysts also compare the PE of one company with another, to check the relative value. The PE multiple of a stable, large and well known company is likely to be higher than the PE multiple the market is willing to pay for another smaller, less known, and risky company in the same sector.&nbsp;</p>

		<ul>
			<li>Generally, a high P/E ratio means that investors are anticipating higher growth in the future.</li>
			<li>The average market P/E ratio is 20-25 times earnings.</li>
			<li>The P/E ratio can use estimated earnings to get the forward looking P/E ratio.</li>
			<li>Companies that are losing money do not have a P/E ratio.</li>
		</ul>
		<br>
		<a href="http://www.valuentum.com/custom/PE_Ratio_3_14_2016_fix.jpg" rel="lightbox[1291834637] nofollow" style="color: rgb(59, 89, 152); text-decoration: none;" target="_blank"><img alt="[PE_Ratio_3_14_2016_fix]" class="bbc_img" src="http://www.valuentum.com/custom/PE_Ratio_3_14_2016_fix.jpg" style="cursor:pointer; max-height:650px; max-width:100%"></a></td>
	</tr>
	<tr>
		<td colspan="2" style="background-color:rgb(247, 247, 247)">&nbsp;</td>
	</tr>
</tbody>

For more fundamental analysis please refer here (I have taken SBI, any scrip can be searched) :


https://www.dynamiclevels.com/en/sbi-fundamental-reports

5

How to Analyse Stocks? Importance of PE Ratio
What this term means? How it comes in handy while investing in a particular stock and security.

  1. Earnings – Historical, Trailing and Forward
    Earnings are profits in a business. Earnings can be defined at various levels. For example, net profits are the profits available to the equity owners. Earnings before Interest and Taxes (EBIT) are available to serve both equity and debt holders. Earnings before Depreciation Interest Taxes and Amortization (EBDITA) is the earning available to a business to replace its assets over a period of time and to serve both equity and debt holders. Earnings of previous years are called historical earnings.
    Trailing, earnings refer to the earnings of the latest four quarters, calculated on a rolling basis. Earnings computed based on future projections are called forward earnings.
  2. Earnings Per Share (EPS)
    Net profits of the company belong to the shareholders. Earnings per share is the net profit divided by the number of shares. It indicates the amount of profit that company has earned, for every share it has issued.
    EPS is calculated as:
    EPS = Net Profit/ Number of shares outstanding
    For a company with Net Profit of Rs. 10 Lakh and outstanding shares 2 Lakh, the EPS would be Rs. 5 (Rs. 10 Lakh/ 2 Lakh).
    A higher EPS shows higher profitability and better earnings for the shareholders and will be preferred over shares of companies with lower EPS. EPS is a significant variable in determining a share’s price.
  3. Dividend Per Share (DPS)
    Dividend is generally declared as a percentage of the face value of the shares. It is the portion of profit which the company distributes amongst its shareholders. For example, 40% dividend declared by company will translate into a dividend of Rs. 4 per share with a face value of Rs 10 (10*40% = 4). This is known as Dividend Per Share (DPS).
  4. Price to Earnings Ratio (PE Ratio)
    Price to Earnings Ratio or the PE Ratio measures the price that the market is willing to pay for the earnings of a company. It is computed as:
    Market price per share/Earnings per share
    PE is referred as a multiple of per rupee of earnings. When one refers to a stock trading at PE multiple of 12x, it means the stock is trading at twelve times its earnings. The PE multiple based on historical earnings is of limited value. The prices change dynamically, while the reported earning is updated every quarter. Therefore, prices tend to move even after the historical earning per share is known, in anticipation of the future earnings.
    If it is expected that earnings of a firm will grow, then the market will be willing to pay a higher multiple per rupee of earning. The focus is, therefore, on ‘prospective’ PE or how much the current price is discounting the future earnings. For example, when analysts say that shares of XYZ company is trading at 20 times its 2014 earnings, but is still about 15 times the 2015 earnings, given the state of its order book. What they are saying is that the growth in EPS is likely to be high, and therefore the current high PE based on historical numbers may not be the right one to look at.
    Most publications and reports show the PE using historical earning numbers from the latest quarterly reports. Analysts’ estimates of future earnings are not widely available and they may vary. Some publications report ‘consensus’ view of prospective earnings.
    It is common to look at the PE multiple of the index to gauge if the market is overvalued or undervalued. The PE multiple moves high when prices run ahead of the earnings numbers and the market is willing to pay more and more per rupee of earnings. When markets correct and uncertainty about future earnings increases, the PE multiple also drops. A value investor, who would like to pick up stocks when they are cheap, may be interested to purchase when PE is low. Analysts also compare the PE of one company with another, to check the relative value. The PE multiple of a stable, large and well known company is likely to be higher than the PE multiple the market is willing to pay for another smaller, less known, and risky company in the same sector.
    Generally, a high P/E ratio means that investors are anticipating higher growth in the future.
    The average market P/E ratio is 20-25 times earnings.
    The P/E ratio can use estimated earnings to get the forward looking P/E ratio.
    Companies that are losing money do not have a P/E ratio.
    www.dynamiclevels.com