Long Term Investment Analysis
PE Ratio
- PE ratio is the most widely used parameter to analyse whether the stock of any company is overvalued or undervalued at any point in time.
- It is calculated by dividing the current market price (CMP) of stock by profit/earnings per share (EPS).
To illustrate, if the PE is 10, it means that to get ₹1 of earnings in one year from a company, the investor is paying ₹10.
The primary difference between the two ratios is that the trailing P/E is based on actual performance statistics while the forward P/E is based on performance estimates.
[!NOTE]
PE ratio tells you how much investors are paying for each dollar of a company’s earnings.
- If a stock has a PE ratio of 20, it means the stock costs 20 times the earnings per share. It’s best used for comparing stocks in the same sector, where tech stocks tend to have higher ratios due to growth expectations, but banks usually have lower PE ratios because of their slower growth.
- If a company has a lower PE ratio, you’re paying less for its earnings, so it could be a better buy.
- When a stock has a low PE ratio,
- it could be because earnings increased fast, but the stock price hasn’t caught up yet, making it undervalued.
- It could also mean earnings stayed the same, but investors lost confidence, causing the stock price to drop.
- When a stock has a high PE ratio, it could mean investors are betting on future growth despite low current earnings, which raises the stock price. But it might also indicate the stock is overvalued if the hype isn’t matched by earnings.
PE ratio alone doesn’t tell you if a stock is good or bad. But, when used with other indicators, it helps explain why a company’s PE ratio is what it is. Comparing PE ratios of peers can show you which stock offers better value.
The most profitable situtation is when you find a stock with a strong earnings trend that is trading at Industry(or broader Market) PE ratio.
Ref
- https://www.drvijaymalik.com/3-principles-to-decide-investable-pe-ratio-of-a-stock-for-value-investors/
- https://getmoneyrich.com/about-price-earning-ratio/
Earnings yield
One variation of price to earnings ratio is earnings yield.
What is earnings yield?
- It is the inverse of the P/E ratio. To calculate earning yield we must keep trailing 12-months EPS in the numerator and share price in the denominator.
That earning yield value is expressed as a percentage of the stock’s price.
If the EPS of a stock is 5 and its current price is 100, its earning yield will be 5%. Interpreting earnings yield is easier than the P/E ratio.
We can compare the earnings yield with the current yield of a 10-Yr government bond. If the earnings yield is higher, we can say that the stock is yielding better returns than the bond. Just for our information, the current yield of a 10-Year government bond is 7.2%. The inverse of earning yield is the P/E ratio. The inverse of 7.2% is 13.8x.
The PEG ratio is a metric that combines the P/E ratio and EPS’ future growth potential. It is an excellent metric for price valuation.” category: “fin” —
PE ratio
- PE ratio is the most widely used parameter to analyse whether the stock of any company is overvalued or undervalued at any point in time.
- It is calculated by dividing the current market price (CMP) of stock by profit/earnings per share (EPS).
To illustrate, if the PE is 10, it means that to get ₹1 of earnings in one year from a company, the investor is paying ₹10.
The primary difference between the two ratios is that the trailing P/E is based on actual performance statistics while the forward P/E is based on performance estimates.
[!NOTE]
PE ratio tells you how much investors are paying for each dollar of a company’s earnings.
- If a stock has a PE ratio of 20, it means the stock costs 20 times the earnings per share. It’s best used for comparing stocks in the same sector, where tech stocks tend to have higher ratios due to growth expectations, but banks usually have lower PE ratios because of their slower growth.
- If a company has a lower PE ratio, you’re paying less for its earnings, so it could be a better buy.
- When a stock has a low PE ratio,
- it could be because earnings increased fast, but the stock price hasn’t caught up yet, making it undervalued.
- It could also mean earnings stayed the same, but investors lost confidence, causing the stock price to drop.
- When a stock has a high PE ratio, it could mean investors are betting on future growth despite low current earnings, which raises the stock price. But it might also indicate the stock is overvalued if the hype isn’t matched by earnings.
PE ratio alone doesn’t tell you if a stock is good or bad. But, when used with other indicators, it helps explain why a company’s PE ratio is what it is. Comparing PE ratios of peers can show you which stock offers better value.
The most profitable situtation is when you find a stock with a strong earnings trend that is trading at Industry(or broader Market) PE ratio.
Ref
- https://www.drvijaymalik.com/3-principles-to-decide-investable-pe-ratio-of-a-stock-for-value-investors/
- https://getmoneyrich.com/about-price-earning-ratio/
Earnings yield
One variation of price to earnings ratio is earnings yield.
What is earnings yield?
- It is the inverse of the P/E ratio. To calculate earning yield we must keep trailing 12-months EPS in the numerator and share price in the denominator.
That earning yield value is expressed as a percentage of the stock’s price.
If the EPS of a stock is 5 and its current price is 100, its earning yield will be 5%. Interpreting earnings yield is easier than the P/E ratio.
We can compare the earnings yield with the current yield of a 10-Yr government bond. If the earnings yield is higher, we can say that the stock is yielding better returns than the bond. Just for our information, the current yield of a 10-Year government bond is 7.2%. The inverse of earning yield is the P/E ratio. The inverse of 7.2% is 13.8x.
The PEG ratio is a metric that combines the P/E ratio and EPS’ future growth potential. It is an excellent metric for price valuation.