The Price-to-Earnings ratio compares a company’s stock price to its earnings per share, helping investors assess whether a stock is overvalued or undervalued based on its earnings.
The PE Ratio is calculated by dividing a stock's market price by its earnings per share (EPS), helping investors evaluate if the stock is overvalued or undervalued.
If Company ABC's stock is ₹500 with earnings per share of ₹20, its PE ratio is 25, meaning investors pay ₹25 for every ₹1 of earnings, reflecting market expectations.
Types of PE ratios include Forward PE (projected earnings), Trailing PE (historical data), Adjusted PE (excludes extraordinary items), and Industry PE (sector averages).
In India, a PE ratio of 15-25 is typically reasonable for established companies, but it varies widely across sectors, market capitalizations, and growth stages.
Absolute PE focuses solely on current market price and earnings, while Relative PE compares current PE to historical or peer ratios for a broader valuation context.
Absolute PE evaluates the stock’s price against its EPS without context, whereas Relative PE assesses undervaluation or overvaluation compared to historical trends.
Absolute PE provides a quick valuation snapshot, while Relative PE offers broader insights by analyzing historical or industry contexts.
Absolute PE does not involve comparisons, whereas Relative PE relies on comparing past performance or industry averages.
Absolute PE gives a basic valuation metric, while Relative PE provides deeper insights into trends and potential investment value.
The PE ratio is a widely accepted valuation metric, allowing investors to compare stocks easily and gain insights into market expectations and growth potential.
The PE ratio overlooks growth rates, debt, cash flows, and industry factors, which can lead to misleading comparisons & incomplete insights into a company's financial health.