PE ratio for Stock Valuations - Analysis of the company, Investing in Stock Markets Video Lecture | Investing in Stock Markets - B Com

hi I'm Arctic Krishnan you are watching
A to Z of stock market investing today
let's look at P for P ratio imagine you
have a rich uncle who's just asked you
to pick very good stocks for his
personal portfolio how do you go about
choosing these stocks as you know there
are over 6,000 stocks listed on the
Indian markets so how do you find the
right stocks to own basically seasoned
investors apart from looking for the
right sectors to own use this metric
called the p/e ratio or the P multiple
the p/e ratio is nothing but short for
price earnings ratio the numerator of
this ratio is basically the stock price
the current market price of the stock so
when you see these ticker tapes running
on the exchanges both the BSE and NSE
the price that you find there becomes
the numerator of the p/e ratio the
denominator is the earnings per share it
is basically the net profit of a company
which belongs to each shareholder so the
net profit divided by the number of
shares that the company has issued
becomes the EPS of the company
well you look to the company's latest
quarterly results filings if a company
has given out an ad in the newspaper or
put it up in on its website you will
find that the quarterly results filing
gives the latest quarterly EPS the EPS
for the last one year as well as the EPS
for the same quarter last year you
usually use the financial years EPS has
the denominator for calculating the p/e
ratio the p/e ratio tells you how many
years profits you are actually paying in
order to buy a per share for example if
the Bajaj Auto stock today trades at
2500 rupees and it's last year's EPS was
hundred rupees the p/e ratio is 25 times
effectively when you buy a share today
you are expecting it to pay back in form
of profits over the next 25 years 25
years seems to be a very long time in
fact to get back your money right so is
that a very high P it is a fairly high P
but when a company is given a very high
p/e by the market it means that
investors expect its profits to grow at
a very high rate over the next few years
well that depends on whether you're a
growth investor or a value investor
wrote investors as we discussed in an
earlier video tend to buy stocks with
high growth prospects and are willing to
pay a high price for it value investors
try to buy stocks which achieved in the
hope that the markets expectations of
growth will be beaten by the company in
selecting stocks based on their p/e
ratio what matters is not the actual P
but the markets estimates of growth
rates for the company in future so
different investors in the market may
have their own estimates of how fast a
company can grow this is what makes four
buys or sells in the market so today by
judge or two actually trades at a p/e of
twenty five times Tata Motors looks very
cheap at nine times this tells you that
most investors in the market expect
Bajaj autos to wheelers to sell at a
rapid rate over the next few years
whereas they expect Tata Motors trucks
to deliver a very sluggish growth over
the next few years
when you listen to analyst talking on TV
or people making recommendations on TV
you often find people mentioning many
types of p/e ratios so there is
reference to a trailing p/e historic P
forward p/e and so on what do these
things mean
you
you
in reality using the p/e ratios not so
easy well the P part the price is quite
indisputable because you take it from
the current market price the denominator
is subject to a lot of estimation and
guesswork so some companies may part of
their current profits through some
creative accounting
sometimes analysts may make projections
which are very widely varying for the
next year so you will be in a dilemma
about which forward earnings to use
similarly a company's growth rate that
you estimate may go very wide of the
mark and the company may end up
delivering a very different profit
number for the future years therefore
the p/e ratio though it may look simple
is not really that easy to apply after
all if you could pick stocks just based
on one metric like the p/e ratio
everybody would be a billionaire isn't
it
you