Price earnings ratio is the ratio of profit after tax to the total number of issued shares.Another way to calculate it is to split the share price By EPS.. Finding a stock price is easy. Complexity begins with the calculation of revenue.It may be current / previous year TTM (tracking 12-month earnings) or forecast Revenue For next year.
Price-earnings ratio indicates the number of years in a given profit it takes to recover an investment. This means that a stock with a price-earnings ratio of 30 will take 30 years for the investment to be returned to the buyer if the profit does not change.
One of the biggest revenue challenges is not taking into account the capital structure of a company. Simply put, it means completely ignoring the debt that the company has taken.
Price-earnings ratios tend to capture market suffering and ecstasy. If the market is bearish and investors are discouraged in the future, the price-earnings ratio of companies and indices will shrink. At the bullish stage, the exact opposite happens.
Ben Graham used price-earnings ratios to determine “a reasonable upper limit to stay within a conservative valuation.” Meanwhile, CANSLIM’s father, William O’Neill, said, “Contrary to most investors, price-earnings ratio was not a factor associated with price fluctuations.”
O’Neill found in a detailed survey of stocks from 1953 to 1988 that the Dow Jones Industrial Average had an average price-earnings ratio of 20 before the stocks rose significantly. Did. Evidence supports the fact that there is a persistently high price-earnings ratio: Asian paint, Berger, Nestle, Page Industries, Symphony, Pidilite, D’Mart (Avenue Supermarts), Titan.
PI ratio (P / E vs. index)
Divide the price-earnings ratio of a company by the price-earnings ratio (Nifty) of the index to calculate the ratio of PI (PE to index).For example, AsianPaints has a price-earnings ratio of about 125. Nifty The price-earnings ratio is about 37. That is, 125/37 = 3.3 times the ratio.
In January 2006, the same ratio was 28/17 = 1.6. It was 60/21 = 3 in January 2015. After doing this exercise, you will find that Asian Paints are usually traded between 1.5 and 3.5 times the PI (PE to Index) ratio. You can do the same exercises for the strains you are interested in to find the range.
The PI ratio indicates the amount of stock valued by the market to the entire market.
Do not sell stocks at high valuations. A trailing stop (a stop loss that keeps the price trailing even if the stock price rises) because the stock price can maintain a high price-earnings ratio or shift to a high price-earnings ratio during a major bullish phase. ) Is always best to use. , And selling out early often means that you are not participating in the most explosive stages of price increases.
Again, following this suggestion, even 100+ PEs can comfortably ride stocks like D’Mart and get the wrath of value investors. The only exception to this is if you are investing in very illiquid stocks. In this case, you need to start clearing in the middle.
In short, instead of using price-earnings ratio as a metric, use it as a general guide to understanding how a stock or index is valued by the market.
PE ratio: What should I do if jitter occurs when PE is high?This is the answer
https://economictimes.indiatimes.com/markets/stocks/news/what-to-do-when-high-pes-give-you-jitters-heres-the-answer/articleshow/80400796.cms PE ratio: What should I do if jitter occurs when PE is high?This is the answer