PE Ratio?

learner · #1 10th April 2007, 04:33 PM

What is P/E Ratio? and
How to calculate P/E Ratio for Sensex?

Alchemist · #2 10th April 2007, 08:25 PM

PE Ratio is

price to earnings ratio of a stock/index

lets consider a stock of company ABC, whose price is Rs 100 per share.

there are 100000 shares of the ABC company.

therefore market value (known as market capitalization) of the company is Rs 100 per share * 1 lac shares = Rs 100 lacs (Rs 10 million)

now suppose the company makes Rs 10 lacs profit each year.

then earnings per share (net profit per share) = total profit divided by the number of shares of the company =

10 lacs divided by 1 lac = Rs 10 per share.

thus price to earnings ratio of the share = price per share / earnings per share =

100 / 10 =

10.

The PE ratio of stock of ABC is 10.

Is this much clear?

If yes then I ll go to the index part. Let me know.

learner · #3 11th April 2007, 08:45 AM

yes its clear now. Pl. go ahead with Index part.

thanks

shailesh · #4 11th April 2007, 10:56 AM

shold the PE ratio of a company always be used while buying stocks for investment? Is it true that higher the the PE , the better the company?

Alchemist · #5 11th April 2007, 12:46 PM

Quote:

Originally Posted by shailesh

shold the PE ratio of a company always be used while buying stocks for investment? Is it true that higher the the PE , the better the company?

PE ratio can never be used alone to make a buy or sell decision.

However PE ratio can be used to

- compare stocks in the same industry.
- compare a stock's valuation to its valuations in the past

Many analyst use PEG ratio to value a stock.

PEG is ratio of PE of a stock to growth of a company.

Suppose PE of a company is 20 and it is showing 30% annual growth in net profits...then its PEG ratio is 20:30 = 0.66

Suppose PE of a company is 30 and it is showing 20% annual growth in net profits...then its PEG ratio is 30:20 = 1.5

PEG of 1 is considered a reasonable valuation. Again PEG cannot be the sole factor in buy or sell decisions.

Alchemist · #6 12th April 2007, 07:10 AM

To calculate PE ratio of an index like BSE SENSEX, one has to calculate earnings of individual components and add them up.

Suppose we want to calculate PE ratio of the SENSEX when it is at 13000.

Then we have to consider SENSEX stocks worth Rs 13000.

In this basket of Rs 13000, we will put each stock according to its weightage in the SENSEX.

Suppose Reliance Industries has weightage of 11%...then in this basket of RS 13000, we will have 11% of RIL = Rs 1430 of RIL.

Then we calculate earnings of Rs 1430 of RIL.

Similarly we calculate earnings of all 30 SENSEX components and add them up to get earnings of SENSEX.

shailesh · #7 13th April 2007, 08:30 PM

Quote:

Originally Posted by Alchemist

PE ratio can never be used alone to make a buy or sell decision.

However PE ratio can be used to

- compare stocks in the same industry.
- compare a stock's valuation to its valuations in the past

Many analyst use PEG ratio to value a stock.

PEG is ratio of PE of a stock to growth of a company.

Suppose PE of a company is 20 and it is showing 30% annual growth in net profits...then its PEG ratio is 20:30 = 0.66

Suppose PE of a company is 30 and it is showing 20% annual growth in net profits...then its PEG ratio is 30:20 = 1.5

PEG of 1 is considered a reasonable valuation. Again PEG cannot be the sole factor in buy or sell decisions.

apart from the PE ratio and the PEG , can u explain what all other factors should be taken into consideration while buying stock for investment?

Alchemist · #8 15th April 2007, 10:16 AM

Quote:

Originally Posted by shailesh

apart from the PE ratio and the PEG , can u explain what all other factors should be taken into consideration while buying stock for investment?

That's a difficult question to answer in just one post... it is like explaining all about fundamental analysis in few lines.

Many things can be considered while buying a stock. Most important among them are:

PE ratio.
Book value.
Cash flows.
Dividend yield.
Market capitalization to sales ratio.
Replacement value.

Alchemist · #9 18th April 2007, 08:49 AM

Alternatively you can look at PE ratio in this way too:

PE ratio = Ratio of market capitalization of a company to net profits of the company.

For an index,

PE ratio = Ratio of sum of market capitalizations of the companies in the index to sum of net profits of the companies in the index.

xman_in · #10 16th November 2007, 07:31 PM

alchemist i read this thread and tried calculating PE ratio however i could not come to the basic or diluted EPS result provided in the table itself can you just go through the result table of Power Grid and let us know how to come to the EPS value provided in the table which is ".96" the table that i request you to use is here.

Alchemist · #11 17th November 2007, 07:58 AM

Quote:

Originally Posted by xman_in

let us know how to come to the EPS value provided in the table which is ".96"

The net profit figure of Power Grid for FY 2008 Q2 is Rs 371.22 crore.

The number of shares outstanding are 420.88 crore.

(The equity is Rs 4208.8 crore and shares are of face value Rs 10 each).

You can also find the number of shares outstanding in this thread on Power Grid.

The eps can be obtained by dividing the net profit by number of shares = Rs 0.88.

The figure mentioned is higher at Rs 0.96 because during Q2, the number of shares outstanding were less. Before the IPO, the number of shares outstanding were 382.62 crore.

While calculating quarterly (or annual) eps, companies use average number of shares outstanding for any quarter (or year.)

Thus the eps figure is higher at Rs 0.96.

xman_in · #12 18th November 2007, 09:51 AM

thanks alchemist for explaining

shrigokul · #13 24th November 2007, 10:50 PM

Sir, Where can i get this details. Kindly provide the web site address.

PE ratio.
Book value.
Cash flows.
Dividend yield.
Market capitalization to sales ratio.
Replacement value.

Thanks & Regards
Gokul

=CrAzYG33K= · #14 28th November 2007, 11:45 PM

A+ Thread ....
I seem to like Alchemist's posts!
Infact, I love them!

jatanr · #15 31st January 2008, 05:51 PM

Quote:

Originally Posted by =CrAzYG33K=

A+ Thread ....
I seem to like Alchemist's posts!
Infact, I love them!

Agreed. Brilliant, and yet simple, explanations.

reji · #16 15th March 2008, 10:20 PM

Dear Alchemist,

I read somewhere that PE Ratio of Essar Oil as on 12th March is -489 and EPS is -0.49, How is it possible to have an earnings of minus figure? Is it the expenditure of the company is more than income?

Regards

Reji

InvestorB · #17 15th March 2008, 10:41 PM

Quote:

Originally Posted by reji

Dear Alchemist,

I read somewhere that PE Ratio of Essar Oil as on 12th March is -489 and EPS is -0.49, How is it possible to have an earnings of minus figure? Is it the expenditure of the company is more than income?

Regards

Reji

That means that the company is making loss and hence the earning is in negative.

eps=Profit/total shares

note that eps figure varies depending on the period you choose for calculating it ., like quarterly/annual etc.,

Alchemist · #18 16th March 2008, 08:47 AM

Quote:

Originally Posted by reji

Dear Alchemist,

I read somewhere that PE Ratio of Essar Oil as on 12th March is -489 and EPS is -0.49, How is it possible to have an earnings of minus figure? Is it the expenditure of the company is more than income?

Regards

Reji

For loss making companies, the PE ratio will be negative.

(PE ratio cannot be used for valuing loss-making companies).

MMK · #19 18th March 2008, 08:32 AM

excellent explanation.
Cheers
MMK

ezhil_prem · #20 20th July 2008, 02:13 PM

Quote:

Originally Posted by Alchemist

PE Ratio is

price to earnings ratio of a stock/index

lets consider a stock of company ABC, whose price is Rs 100 per share.

there are 100000 shares of the ABC company.

therefore market value (known as market capitalization) of the company is Rs 100 per share * 1 lac shares = Rs 100 lacs (Rs 10 million)

now suppose the company makes Rs 10 lacs profit each year.

then earnings per share (net profit per share) = total profit divided by the number of shares of the company =

10 lacs divided by 1 lac = Rs 10 per share.

thus price to earnings ratio of the share = price per share / earnings per share =

100 / 10 =

10.

The PE ratio of stock of ABC is 10.

Is this much clear?

If yes then I ll go to the index part. Let me know.

Dear Alchemist,

u have given a formula

PE Ratio = price per share / earnings per share

but the thing is that which value i have to take for "price per share"
it changes from time to time

plz clarify my doubt
thanks in advance

Alchemist · #21 20th July 2008, 04:11 PM

Quote:

Originally Posted by ezhil_prem

Dear Alchemist,

u have given a formula

PE Ratio = price per share / earnings per share

but the thing is that which value i have to take for "price per share"
it changes from time to time

plz clarify my doubt
thanks in advance

PE Ratio also varies with price.

Take the latest price available.

Price moving 1% (up or down) isn't going to make much difference to the PE ratio.

ezhil_prem · #22 24th July 2008, 08:29 PM

Quote:

Originally Posted by Alchemist

PE Ratio also varies with price.

Take the latest price available.

Price moving 1% (up or down) isn't going to make much difference to the PE ratio.

Thank u very much.

All ur explanations are clean and neat.

MikeDirnt · #23 7th September 2008, 03:48 AM

hi alchemist,

you make good explanations there. now i understand PEG better. i have never used this term before. can i say a lower PEG is better?

i was searching the web on how to calculate pe ratio of an index and came across your forum first.

i was trying to calculate the pe ratio of my country index but seems to get a value which is questionable. i got a pe of as low as 6.91 which i think is not right. i have published the calculation in a blog but i dont think its nice of me to put it at my first post.

maybe can you help me to calculate the pe ratio of a fictitious index consisting of 2 stocks. i just want to confirm my understanding on how to calculate it. also for the benefits of others who may find this exercise useful

stock A
price = $3.63
market cap = $8332M
shares = 3228M
free float factor = 0.75
rolling eps = $1.423

stock B
price = $15.82
market cap = $17229
shares = 354M
free float factor = 0.3
rolling eps = $1.125

Alchemist · #24 7th September 2008, 04:37 PM

Quote:

Originally Posted by MikeDirnt

maybe can you help me to calculate the pe ratio of a fictitious index consisting of 2 stocks. i just want to confirm my understanding on how to calculate it. also for the benefits of others who may find this exercise useful

Unless I know how this fictitious index is calculated, I won't be able to calculate the PE ratio.

PE ratio for different stocks is different.

Ignore the rest of the post. It is incorrect. See post #26.

================================================== =============

If you want to calculate the PE ratio of an index, just do it like this:

P(I) = (P1 X W1) + (P2 X W2)

P(I) is the PE ratio of the index.
P is the PE ratio of the corresponding stock.
W is the weightage of the stock in the index expressed in percentage.

e.g. if one stock has PE of 10 and weightage of 33.33% and another has PE of 20 and weightage of 66.66%, the PE ratio of the index will be:

P(I) = (10 X .3333) + (20 X .6666) = 3.33 + 13.33 = 16.66.

W1 and W2 will depend on how the index is calculated.

MikeDirnt · #25 8th September 2008, 10:36 AM

P(I) = (P1 X W1) + (P2 X W2)
W1 and W2 will depend on how the index is calculated.

this is interesting. i didn't know can calculate this way as well

the ST Index of Singapore is calculated as follows.

1) sum all stocks capitalisation multiply by free float factor
2) sum all stocks earnings by free float factor
3) divide (1) by (2)

anyway i have already gotten my calculation right. there was some error in the syntax of my excel formula. thanks anyway i learn something new.

Alchemist · #26 8th September 2008, 11:53 AM

Quote:

Originally Posted by MikeDirnt

P(I) = (P1 X W1) + (P2 X W2)
W1 and W2 will depend on how the index is calculated.

this is interesting. i didn't know can calculate this way as well

the ST Index of Singapore is calculated as follows.

1) sum all stocks capitalisation multiply by free float factor
2) sum all stocks earnings by free float factor
3) divide (1) by (2)

anyway i have already gotten my calculation right. there was some error in the syntax of my excel formula. thanks anyway i learn something new.

My earlier post was incorrect.

PE can't be calculated in that manner.

The formula that you have mentioned is correct.

vasa1 · #27 8th September 2008, 12:34 PM

Quote:

Originally Posted by Alchemist

That's a difficult question to answer in just one post... it is like explaining all about fundamental analysis in few lines.

Many things can be considered while buying a stock. Most important among them are:

PE ratio.
Book value.
Cash flows.
Dividend yield.
Market capitalization to sales ratio.
Replacement value.

Notice you left out sum-of-the-parts, the last rally's hot favourite

!

MikeDirnt · #28 10th September 2008, 11:07 AM

Quote:

Originally Posted by Alchemist

My earlier post was incorrect.

PE can't be calculated in that manner.

The formula that you have mentioned is correct.

I did not verify your earlier formula

but since you said its wrong, i will erase it from my understanding.

vasa1 · #29 13th June 2009, 08:03 PM

Alchemist,

What is the difference between P/E and Cash P/E?

For example,

Code:

Bharti Airtel
NSE- 12/06 (17:30) 	828.15 	-3.07% 	40.79 	57.68 	20.30 	14.36
Cairn India
NSE- 12/06 (17:30) 	244.30 	-4.48% 	0.33 	0.33 	740.30 	740.30
Coromandel Fert
NSE- 12/06 (17:30) 	201.70 	-5.73% 	35.48 	39.49 	5.68 	5.11
Crompton Greave
NSE- 12/06 (17:30) 	292.50 	-1.38% 	10.83 	12.07 	27.01 	24.23
DCB
NSE- 12/06 (17:30) 	39.95 	-4.54% 	-0.25 	0.51 	-159.80 	78.33

These values are from Moneycontrol.com for part of my portfolio.

hsb · #30 30th July 2009, 10:35 PM

Quote:

Originally Posted by Alchemist

PE ratio can never be used alone to make a buy or sell decision.

However PE ratio can be used to

- compare stocks in the same industry.
- compare a stock's valuation to its valuations in the past.

Hello Sir,

I have following questions regarding PE ratio.

1) Does it mean that after buying a scrip which fits this criteria,I should wait for the PE to match its avg.industry PE or its own highest multiple level?
If I am not getting it right,please tell me how to use this ratio for selling a stock?

2) where can I get to know "historical/past" PE ratio band of a scrip?

I kindly request you to please explain and help me.

P.S. I am not fluent in English so please bare with me.

maverick · #31 30th August 2009, 02:58 PM

Found this article in Outlook Money...

http://money.outlookindia.com/article.aspx?261275

This says that the historical data tells us, whenever Nifty P/E moves above 22, Nifty witnesses a downturn. Right now, Nifty P/E hovers around 21.

vasa1 · #32 19th September 2009, 08:15 AM

And now this:

Quote:

Gertrude Stein said, "A rose is a rose is a rose," but the same cannot be said about earnings per share (EPS).

While the math may be simple, there are many varieties of EPS being used these days, and investors must understand what each one represents if they're to make informed investment decisions. For example, the EPS announced by the company may differ significantly from what is reported in the financial statements and in the headlines. As a result, a stock may appear over- or undervalued depending on the EPS being used. ...

Source

vasa1 · #33 5th February 2010, 06:43 AM

Investor's Corner: P-E Ratio Not Much Use In Picking Stocks !!!

Link

Quote:

"Our ongoing analysis of the most successful stocks from 1880 to the present shows that, contrary to most investors' beliefs, P-E ratios were not a relevant factor in price movement," IBD's founder and chairman, William O'Neil, writes in "How to Make Money in Stocks."

Alchemist · #34 5th February 2010, 07:10 AM

Quote:

Originally Posted by vasa1

Investor's Corner: P-E Ratio Not Much Use In Picking Stocks !!!

Link

Quote:

Value-focused investors use P-E ratios to determine buy opportunities. If a stock is performing below the industry's average, generally it is deemed undervalued and a buy opportunity.

That's definitely not true.

That's not how value investors make their decisions.

A value investor does look at the PE ratio, but not in isolation.

He looks are many other factors like

- quality of earnings.
- sustainability of earnings.
- growth potential of company and industry.
- quality of management.
- relative position of the company in the industry.
- nature of business.
etc.

PE ratio works much better than most other tools that an investor has, but it works only for those who know how to use it.

vasa1 · #35 5th February 2010, 07:46 AM

The author of the quote is the CAN SLIM guy.

"O'Neil emphasizes the importance of choosing stocks whose earnings per share (EPS) in the most recent quarter have grown on a yearly basis. For example, a company's EPS figures reported in this year's April-June quarter should have grown relative to the EPS figures for that same three-month period one year ago."

Anyway, time to get the shopping list ready. I suspect discount season is here...