PE ratio is very common while cosidering stock buying or analysing. PE stand for price to earning (EPS) ratio. Suppose a co. A has last year eps is 5 and is assumed that co. will post eps 7 next year. Now co.'s stock price is Rs 20, it means you are buying stock at PE of 4 last year and PE of 3 for the next year earning. Simplly PE = stockprice/EPS. At stock price 20, it means market giving 4 time premium to the earning of last year. If co. post 7 eps then mkt will give also 4 time and stock price will become Rs.28.
AT WHAT PE WE SHOULD BUY STOCK?
This is important that at what PE we should buy. First we should know what is its sector or industry avg PE. Every sector has different PE, If sector is most demanding then Its PE is high. Suppose steel indust avg PE is 6, and A steel co whose last yr EPSis 4, then if buy @ 24 at PE 6 (24/4) is a fair value buying, but if you buy this stock at a price 20 then your buying is undervalue buy and its good buy as you are getting at lower PE. So we must try to buy stock as much lower PE as possible coz at lower PE stock become cheap in terms of value. Keep in mind every sector has diferent PE. If you buying auto share then find auto sector avg PE and compare with your buying stock PE.
Summary :
PE= stockprice/EPS
We must try to buy stock at lower pe than its industry pe ratio.
In the next analysis we will discuss about EPS.
If you like knowledge share then drop the comments.
AT WHAT PE WE SHOULD BUY STOCK?
This is important that at what PE we should buy. First we should know what is its sector or industry avg PE. Every sector has different PE, If sector is most demanding then Its PE is high. Suppose steel indust avg PE is 6, and A steel co whose last yr EPSis 4, then if buy @ 24 at PE 6 (24/4) is a fair value buying, but if you buy this stock at a price 20 then your buying is undervalue buy and its good buy as you are getting at lower PE. So we must try to buy stock as much lower PE as possible coz at lower PE stock become cheap in terms of value. Keep in mind every sector has diferent PE. If you buying auto share then find auto sector avg PE and compare with your buying stock PE.
Summary :
PE= stockprice/EPS
We must try to buy stock at lower pe than its industry pe ratio.
In the next analysis we will discuss about EPS.
If you like knowledge share then drop the comments.
Sir, thanks for sharing this useful information. please let me know where we can find sector average PE? Pl guide.
ReplyDeleteYou can avg top five co. Of that sector or can find on money control.com
ReplyDeleteSir, what the significance of Reserve in balance sheet.i know that its a part of equity in balance sheet, this when added with liability then its equals assets. if so when reserve increases then does this mean that either liability should reduce or asset shout increase offset to balance above mentioned equation. is it right?
ReplyDeleteDear Sir,
ReplyDeleteHappy Easter. May God bless you, your family and all your blog readers with good health and all the happiness in life.
Thank you sir, and Happy Easter to you and all.
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