Summary:
When it comes to the world of stock trading, there's a secret code that can provide valuable insights into a company's and its stock’s potential - it's called the Price-to-Earnings (PE) ratio. Understanding PE ratios is like having a window into the minds of investors. You can use it to figure out if a stock is overpriced, underpriced, or just right. In this blog, we'll unravel the significance of PE ratios and why they matter to investors.
Before we explore the stocks with the highest Price-to-Earnings (PE) ratio, let’s first understand what a PE ratio is. Simply put, a PE ratio indicates if the price of a stock is fair or not. You can think of the PE ratio as an easy way to peek into the world of investing.
The formula for calculating a PE ratio is as followes:
PE Ratio = Stock Price / Earning Per Shares (EPS)
To understand this further, let us consider an example. Imagine you own a pie and want to know the amount people are willing to pay to own a slice of that pie based on how popular it is. That's what the PE ratio does. It compares the price of the stock with how much money the company makes. If the PE ratio is high, it's shows that people or investors are quite positive about the company's future and expect its earnings to grow substantially. On the other hand, a low PE ration shows that investors are not expecting big earnings growth in the company’s future.
What higher or lower PE ratios mean
There are two types of PE ratios:
- Trailing PE Ratio: This evaluates out the company's recent performance by looking at their earnings from the past year.
- Forward PE Ratio: This, on the other hand, focuses on the company's plans for the future by looking at expected earnings for the next year.
PE ratios are a helpful tool in the investor's toolbox, but they are not the only one. Remember, the meaning of PE ratios changes based on things like what the company does, how it's faring in comparison to competitors, and what's happening in the market and in the world at large.
While a high PE ratio could mean the company has big dreams and high potential, it can also indicate an overpriced stock. Alternatively, a low PE ratio might not reflect much growth potential, it could also mean that you can purchase the stock at a good deal.
For investors, stock purchase decisions should not solely be based on the PE ratio. You should consider other factors like how healthy the company's finances are, what line of business it's in, and what's going on in the whole stock market.
Having said that, let’s look at some stocks with the highest PE ratios in the Indian market.
Indian stocks with the highest PE ratio
Pidilite Industries Ltd.
This India-based company makes special chemicals for regular as well as industrial usage. They've got two main parts to their business: Consumer and Bazaar (C&B) and Business to Business (B2B).
The Consumer & Bazaar (C&B) segment deals with selling directly to retail customers like carpenters, painters, students, families, and offices and includes products such as glue, paint, and other home usage products. You may have even used a Pidilite product in your home. They also specialize in selling products like adhesives (fancy glue), sealants, art materials, and chemicals for building and painting.
Kemp & Co.
Kemp & Co. is a Mumbai-based entity that deals in diverse products: soft and hard luggage, investments, and even real estate. The company officially has three broad segments: Real Estate, Trading Activity, and an Unallocated segment.
With the Trading segment, Kemp & Co deals in retailing vanity cases, briefcases, suitcases and other travel goods and accessories primarily made of plastic mould, while the Real Estate segment specializes in letting out properties.
Active Clothing
Active Clothing specializes in designing, manufacturing, as well as the retailing of apparels and readymade garments. The company has three main divisions of business: the Circular Knits division, the Flat Knits division, and the Jackets division.
Active Clothing’s garments are produced in multiple style across its three categories. They include babywear, joggers for men, women, and children, sweatshirts, circular knit t-shirts, outwear jackets, and flat knit sweaters among others.
Chandra Bhagat
The Indian medicine company, Chandra Bhagat manufactures pharmaceutical formulations and other products across domestic and international markets. The extensive coverage of its products is managed by the brand's sales force and distribution network.
It’s range of products contains several pharmaceutical formulations including oral syrups, capsules, tablets, and injections (lyophilized vials, prefilled syringes, vials, ampoules).
ITI Ltd.
ITI Ltd. is primarily engaged in manufacturing, trading, and servicing telecommunication equipment. They also provide other associated/ancillary services in their domain.
The company manufactures an extensive array of electronic products that are manufactured, including Wireless fidelity (Wi-Fi) equipment, Set-top boxes, Handheld terminals for smart card authentication, Intelligent cards and banking cards, Ruggedized telephones for defence forces, and more.
Invest wisely
PE ratio is only one of the many indicators of a stock’s performance and can be an effective tool for investors. However, the key is to know what it indicates and how you can use it to your advantage. So study all the facts and invest wisely!
Disclaimer
The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.