how to know whether a P/E is high or low of a stock?

POSTED BY rajan.panchal24 ON February 5, 2012 12:43 pm COMMENTS (6)

How to know whether P/E ratio is high or low for a stock. Determine a stocks P/E high or low we need something to compare with. Also, what does a negative P/E mean??

thanks in advance.

6 replies on this article “how to know whether a P/E is high or low of a stock?”

  1. BanyanFA says:

    Hi Rajan,
    It is very difficult to tell you how to read a balance sheet – unless you have some idea of accounting.

    Simply putting, Balance Sheet has two sides

    A. Liabilities – it tells who are the suppliers of funds to the company. It can either be owners (Share Capital + Reserves) or Lenders;

    B. Assets – It tells where the funds are invested.

    Simply putting A must be equal to B as all funds with the company would be invested in any of the named Assets.

    A company is said to be highly leveraged where it has taken more loan from outsiders. The value of the share holders is derived by dividing the Owner’s portion in Liabilities section by the total number of shares.

  2. Dear Rajan, if you are serious about all these things & specially for your balance sheet reading query, My take ‘ll be to first try to write your own balance sheet. Say in your own means, you are a company. You have income & expenses. Assets & liabilities. Profits & losses.

    Try to create a BS for your own life. I bet it ‘ll be a learning experience for you.

    Thanks

    Ashal

  3. BanyanFA says:

    Rajan,
    PE of a stock stands for Price to Earning Ratio. As mentioned by Ramesh, PE is dynamic and keeps on changing every day with the stock price and earning of the company. While PE ratio gives an indication of how expensive / cheap is a stock (from valuation perspective), it should not be considered as a sole indicator to buy a stock.

    For example, good blue chip stocks like Reliance Industries, ICICI Bank, HDFC, etc. quote on high PEs. This denotes that the market is ready to buy them at a higher valuation as the market is comfortable that the company shall continue to do well in future.

    On the contrary, poor quality stocks may tend to have low PEs reflecting market’s discomfort that these stocks may not perform well and hence not ready to buy an excessive price for the stock’s existing earnings.

    Be careful of the fact that several punter / speculative stocks rule on excessive PEs, like 100+ which can end you up in trouble if the stock prices start going down.

    It is good to compare the PE of a stock with its comparative peer to identify if a share is ruling at discounted valuation. In this comparison it is important that you select comparable peers. It doesn’t make sense to compare a newly startup bank with HDFC Bank as their PEs won’t be comparable. It is sensible to compare PE of ICICI Bank to HDFC Bank to get an idea about the valuations.

    Regards
    BFA

    1. rajan.panchal24@gmail.com says:

      Thanks…all
      what i learned is that P/E cannot be taken solely or isolation. It can say whether a stock is undervalued or overvalued when it is compared with its peers. I may happen P/E can be high but its stock price might be low or decreasing or vice versa.

      Can any one tell me how can I read a balance sheet of a company and what interpretations should one make to decide buying of stocks??

  4. Ramesh says:

    Also P/E is a dynamic ratio dependent on both price and earnings. And it does not have a future predictive value. So, use it with a pound of salt.

  5. Dear Rajan, Please don’t look P/E in isolation for any stock. The P/E may be different from sector to sector & even a common sector, the PE may be different for stocks. For example, please check the banking sector’s avg. P/E & compare the P/Es of PSU banks with respect to Private banks.

    Thanks

    Ashal

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