PE Ratio What It Does Not Tell You
Dalal Street Investment Journal|June 20, 2022
Stock market analysis with the help of PE multiple is extremely popular. There could be very many reasons for PE being a favoured ratio for stock market analysis but it may not be the most appropriate way to look at PE and take investment decisions. Yogesh Supekar highlights the importance of looking beyond the PE ratio while discussing the risks of giving too much emphasis to it
PE Ratio What It Does Not Tell You

Price to earnings (PE) ratio is the first thing one learns when it comes to the stock market. Most stock P market books, almost all the stock market courses and majority of curriculum related to stock market emphasise on understanding the PE ratio and attempt to simplify reading the complex stock market with a simple PE ratio. On the ground too, the use of PE ratio amongst investors is commonplace.

Market commentators use PE readings to narrate market conditions almost on a daily basis and that is partly the reason why investors tend to give so much importance to the PE multiple. It is the combination of being intuitively appealing and the huge acceptance of PE ratio along with the simplicity of calculation that makes it such an attractive matrix to read market valuations and thereby gauge the mood of the market.

Defining the PE Ratio

The PE ratio simply tells us a lot about the market's current view on companies' earnings. Simply put, the PE ratio compares a company's stock price with its earnings per share and helps determine if it is fairly priced. Higher PE ratio often leads investors to conclude that a stock could be overvalued and a lower PE leads investors to believe that the stock is undervalued. However, it may not always be true. What do PE ratios don't tell you? PE ratio helps us understand if a particular stock is fairly valued. There are various ways to estimate from the current PE if the stock is fairly valued. One of the most popular ways is to estimate if the current PE is trading higher than its long-term average.

One can safely suggest that if the current PE is way higher than the long-term average, the stock could be overvalued and vice-versa. One must remain cautious during times when the PE is wandering way above the long-term average PE multiple.

Diese Geschichte stammt aus der June 20, 2022-Ausgabe von Dalal Street Investment Journal.

Starten Sie Ihre 7-tägige kostenlose Testversion von Magzter GOLD, um auf Tausende kuratierte Premium-Storys sowie über 8.000 Zeitschriften und Zeitungen zuzugreifen.

Diese Geschichte stammt aus der June 20, 2022-Ausgabe von Dalal Street Investment Journal.

Starten Sie Ihre 7-tägige kostenlose Testversion von Magzter GOLD, um auf Tausende kuratierte Premium-Storys sowie über 8.000 Zeitschriften und Zeitungen zuzugreifen.

WEITERE ARTIKEL AUS DALAL STREET INVESTMENT JOURNALAlle anzeigen
How To Invest In An Ageing Bull Market
Dalal Street Investment Journal

How To Invest In An Ageing Bull Market

Bull rallies (periods when stock prices rise) and bear declines (periods when stock prices fall) are natural parts of stock market cycles, but they don't follow a fixed timeline.

time-read
5 Minuten  |
July 29, 2024
Should You Entrust All Your Money To A Single AMC?
Dalal Street Investment Journal

Should You Entrust All Your Money To A Single AMC?

If you are a market participant, you have probably heard the quote 'don't put all your eggs in one basket', which suggests diversification. Investors often focus on diversifying across categories like large-cap, mid-cap and small-cap, but they may unintentionally overlook diversification across different AMCs. The question arises: is AMC-wise diversification really necessary? Rakesh Deshmukh takes a closer look at this scenario

time-read
7 Minuten  |
July 29, 2024
Wild Swings Engulf Global Equities
Dalal Street Investment Journal

Wild Swings Engulf Global Equities

U.S. stock markets experienced significant volatility. An early-week rally pushed the markets to new highs, but this momentum faded, primarily due to weaknesses in the tech sector. The major indices had a mixed finish with, S&P 500 and Nasdaq closed lower, while the Dow recorded a notable gain.

time-read
2 Minuten  |
July 29, 2024
U.S. Elections and China's Economy Hamper Commodities
Dalal Street Investment Journal

U.S. Elections and China's Economy Hamper Commodities

Commodity markets experienced selling pressure in the last fortnight, driven by uncertainties surrounding the upcoming U.S. presidential elections, concerns about the Chinese economy, and increased agricultural production in Brazil.

time-read
2 Minuten  |
July 29, 2024
Wealth Building For Retirement Through Mutual Funds
Dalal Street Investment Journal

Wealth Building For Retirement Through Mutual Funds

Retirement is one of the most crucial and lifechanging phases. It marks a period where maintaining your lifestyle becomes paramount even though your regular income stops.

time-read
3 Minuten  |
July 29, 2024
Mastering Investment with Information Ratio
Dalal Street Investment Journal

Mastering Investment with Information Ratio

Information Ratio helps in navigating the complexities of the investment landscape by assessing an active fund manager's performance. And though it has its limitations, it remains an essential part of the finance industry. The article explains what Information Ratio is and how investors can use it as another tool

time-read
6 Minuten  |
July 29, 2024
Plan To Be Financially Independent
Dalal Street Investment Journal

Plan To Be Financially Independent

Each of us aspires to be financially independent as it ensures having enough resources to be self-sufficient and control our finances.

time-read
2 Minuten  |
July 29, 2024
❝Technology is the new game-changer"
Dalal Street Investment Journal

❝Technology is the new game-changer"

With a new breed of young investors entering the financial markets, it is the use of technology that is increasingly playing a major role in how investments are done and tracked. Anand Radhakrishnan, Managing Director, Sundaram Mutual Fund, shares his opinion about how this factor is turning into a significant tool and how it will shape the strategies of his company

time-read
5 Minuten  |
July 29, 2024
What If Donald Trumps?
Dalal Street Investment Journal

What If Donald Trumps?

The potential election of Donald Trump as president in the U.S. carries significant implications for the Indian equity market. It could lead to changes in the global trade dynamics, in particular affecting the Indian IT sector while also raising inflation levels and leading to yet another revision in the visa programme for Indians who want to work in the US. The article takes a closer look at what may lie in store

time-read
6 Minuten  |
July 29, 2024
Sectoral Gains Make A Mark
Dalal Street Investment Journal

Sectoral Gains Make A Mark

Benchmark indices continued their uptrend, reaching new record highs, although the pace has slowed as the broader markets faced selling pressures

time-read
2 Minuten  |
July 29, 2024