- What are the Current Liabilities and How to Calculate: Meaning, Examples, & Formula
- What is a Hammer Candlestick Pattern: Meaning, Formula, & Strategy
- What is Quick Ratio and How to Calculate: Meaning, Formula, and Example
- What is Funds Flow Statement & How to Prepare: Meaning, Objectives, & Examples
- What is Booking Value in Share/Stock Market & How to Calculate: Meaning & Formula
- What is Intrinsic Value of a Share/Stock and How to Calculate: Meaning and Formula
- What is Good Current Ratio & How to Calculate: Meaning, Formula, & Example
- What is Statutory Liquidity Ratio in India & How to Calculate: Meaning & Formula
- What is Capital Expenditure CapEx and How to Calculate: Meaning, Examples, and Formula
- What is Equity Share Capital & How to Calculate: Meaning, Formula & Types
- What is Revenue Expenditures in India: Meaning, Examples, & Types
- What is the Difference Between Assets & Liabilities: Meaning & Types
- What is Cash Reserve Ratio in India: Meaning, Current Rate & Formula
- What is Venture Capital in India: Meaning, Features, Types, & Process
- What are Preference Shares & How to Buy: Meaning, Types, Redemption, & Features
- What are Dividend Stocks in India & How to Buy Highest-Paying Dividend Stocks
- What are Treasury Bills in India & How to Buy/Invest: Meaning & Interest Rates
- What is Ebitda Margin & How to Calculate: Meaning & Formula
- What is Liquidity Ratio: Meaning, Formula and How to Calculate
- What are Non Current Assets: Meaning, Examples and How to Calculate
- What are Current Assets: Meaning, Examples, and How to Calculate
- Return On Assets
- Churn Rates
- Difference Between Capital Expenditure and Revenue Expenditure
- Short Term Capital gain Tax on shares
- Capital Gains Tax on Property
- Short Term Capital Gains Tax
- Long Term Capital Gain Tax
- Capital Gains Tax
- Net Interest Income
- Long Term Capital Gain Taxes On Shares
- Bonus Issue of Shares
- Foreign Direct Investments (FDI)
- Trade Deficit
- Purchasing Power Parity
- What is the Poison Pill Strategy
- Fiscal Policy
- Free Cash Flow
- Angel Investor
- Redemption of Debentures
- Stock Exchange
- Equity Shares
- Government Bonds
- Short-Term Capital Gain on Shares
- Capital Gain Index
- Cost Inflation Index
- Capital Gain Bonds
- Breakeven Point
- ESOP - Employee Stock Ownership Plan
- Non-Performing Assets: All You Need to Know
- Long-Term Capital Gain on Shares: Everything You Need to Know
- Capital Gains on Equity Shares: Types, Calculation, Tax Rates and More
- Capital Gains Exemptions: Everything You Need to Know
- Everything You Need to Know About Growth Stocks
- What is Multibagger Stocks & How to Find Multibagger Stocks
- What are Penny Stocks in India
- What is BO ID in Share Market
- Know All About Online Share Market Trading
- Stock Market Trading: Types Of Trading and Its History
- What is Online Stock Trading In India For Beginners
- Difference Between Stock Market and Commodity Market
- What Is Pre Open Market Stock Trading - Meaning & Benefits
- Relative strength index (RSI)
- Understanding Candlesticks
- Important Chart Types
- Support and resistance
- Types of Trends
- Bollinger Bands
- Qualities of a super trader
- Risk Management
- Moving averages
- Volume indicator
- Breakouts & Breakdowns
- Identifying trends
- Supertrend indicator
- Contingent liabilities
- Volume, realisation, and revenues explained
- Understanding debt
- Exceptional Items
- PE Ratio
- Outstanding Share Capital
- Book value
- Share Buyback
- Stock Splits
- Understanding Rights Issue
- Bonus Shares
- Technical Analysis
- Various types of Market Participants
- The Basics of Stock Market Analysis
- What Is The Stock Market?
- What is Sensex and Nifty?
- Basics of Investment
- Asset Allocation
- How to Analyze a Balance Sheet?
- Industry Analysis
- Ratio Analysis
- What is share market?
- Stock market guide for beginners
- Share market investment tips
- How does the stock market work?
- What is NSE and BSE?
- Benefits of equity investment
- What are the types of share trading orders?
- What is a circuit breaker?
- Risk management while investing in the share market
- What is an IPO in the share market?
- Show all articles
Do you wonder how long it will take to get back the same amount you have invested from your investment? You can find this out before investing using PE ratios!
Before we begin, imagine that you’ve made a bank FD worth Rs. 100 with interest rate 5.25% and you can’t touch this money for 1 year. One year later, you would have earned Rs. 5.25 in interest. Let’s call this your ‘earning’. Now, you gave Rs. 100 for the FD, obviously that’s your own Rs. 100, but let’s call this the ‘price’. If you divide this price with the earnings, you get a number close to 19. What this means is that you are paying Rs.19 to get one rupee in an interest payment. Essentially, you’ll take approximately 19 years to earn back Rs. 100 again. This is called the price to earnings ratio.
Let’s understand this ratio in relation to the stock market.
Welcome to our new series, Learn with Upstox!
I’m Aaditya Iyengar and in this series, we’ll be discussing some key aspects of fundamental analysis, corporate actions and some important general concepts about the stock market.
Let’s talk about the PE Ratio, what it tells us about an investment and how it’s calculated.
Let’s get started.
What is PE Ratio?
The Price to Earnings Ratio is probably the most important of all the financial ratios, when it comes to ratio analysis. A PE Ratio is when you take the price of a stock and divide it by the EPS, which is the earnings per share.
Now to calculate the EPS, you have to deduct all the company’s expenses, interest payments and tax from its revenue and divide this number by the total number of shares. The final number you get from this is the EPS. EPS tells us the profit per share.
What does a PE Ratio tell us about an investment?
A PE Ratio simply tells us how much money the market is charging for every rupee in a company’s profit. For example, if the EPS of a firm is Rs. 25 and its current share price is Rs. 500, we get a PE of 500/25, which is 20. This means, people are paying Rs. 20 to get every Re. 1 in the company’s earnings.
Many amateurs in the markets will say that PE around 18 is a good buy and one around 30 is a good sell. However, one can never decide if a given PE is too low or too high unless they compare that stock to its peers.
For example, the pharma sector is here to stay. People will need healthcare for as long as they’re alive. That’s the reason people are willing to pay a bigger price for pharma stocks. So, don’t be surprised if you see high PEs in the pharma sector. What matters is how the PE performs relative to its peers.
Always remember, you can’t take an investment decision only on the basis of PE ratio.
That’s it for now. Thank you so much for watching our video on PE Ratio, in our series, Learn with Upstox. I hope you learned something today.
If you find value in these videos, like, share and subscribe to our channel. Do not forget to hit that bell icon so that you get a notification every time we upload a video.