What is P/E Ratio? How P/E Ratio used to Pick stocks in the Secondary Market?

PE (price of return

Is one of the means to assess the stock in addition to other ways to evaluate stocks, but the easiest and most common ways to know you bulked share price reached or not is PE and used by speculators and investors alike in their choice of shares of the way. There are other ways in addition to PE to assess the fair share price and more resolution methods are a way discount cash flows in this way is the calculation of future dividends that will be distributed by companies to investors and its growth rate and then the current value of these flows account future cash with the current share price in addition to the required rate of return for investment in this stock.

PE of the most important financial indicators that are supposed to be among the tools dealers in the financial markets, for the reasons that have been mentioned in the previous advisors are explained how to use PE.

PE = Law arrow / profit share price

P/E ratio is a PRICE EARNING ratio. It is calculated when market price (MP) per share/stock is divided by earning per share (EPS), [MP per share/EPS]. If the MP per share is $50 and EPS is $10, the PE ratio is5.

Higher PE ratio is used to determine the value of share in the secondary market, whether it is over or under valued and for investor perspective to decide whether to buy or not to buy shares at a particular market price. Generally higher PE ratio is more reliable and considerable buying option for an investor. 

It is one of the measures to pick the stock from the stock market, but not only measure to pick the stock from the secondary market, there are several other considerations like company's own financial and operational stability, market capitalization, historical market rate, dividend policy, stakeholders influence in companies affairs and above all no speculation effect on current market price or major fluctuation in company's average or estimated market price. Competitors market performance and trends analysis of similar stocks in similar markets are also considered.

Good day Sir,

Thank you for your invitation.

Apologies, I have no knowledge or experties on this topic.

In a simple way, you can look at the PE Ration as the amount you pay for each $1 of company earnings when you are buying company shares.

In secondary market, you should go for a PE Ratio as low as possible

Agreed with Mr. Vinod

Understanding the P/E Ratio

Let's take a closer look at what the P/E ratio tells us:

P/E Ratio= Market value per share/Earnings per share

There are two primary components here, the market value (price) of the stock and the earnings of the company. Earnings are very important to consider. After all, earnings represent profits, and that's what every business strives for. Earnings are calculated by taking the hard figures into account: revenue, cost of goods sold (COGS), salaries, rent, etc. These are all important to the livelihood of a company. If the company isn't using its resources effectively it will not have positive earnings, and problems will eventually arise. Besides earnings, there are other factors that affect the value of a stock. For example:

• Brand - The name of a product or company has value. Established brands such as Proctor & Gamble are worth billions.
• Human Capital - Now more than ever, a company's employees and their expertise are thought to add value to the company.
• Expectations - The stock market is forward looking. You buy a stock because of high expectations for strong profits, not because of past achievements.
• Barriers to Entry - For a company to be successful in the long run, it must have strategies to keep competitors from entering the industry. For example, most anyone can make a soda, but marketing and distributing that beverage on the same level as Coca-Cola is very costly.

All these factors will affect a company's earnings growth rate. Because the P/E ratio uses past earnings (trailing12 months), it gives a less accurate reflection of these growth potentials.

The relationship between the price/earnings ratio and earnings growth tells a more complete story than the P/E on its own. This is called the PEG ratio and is formulated as:

PEG ratio= Price to earnings ratio/Annual EPS growth

*The number used for annual growth rate can vary. It can be forward (predicted growth) or trailing, and either a one- to five-year time span. Check with the source providing the PEG ratio to see what kind of number they use.

Looking at the value of PEG of companies is similar to looking at the P/E ratio: A lower PEG means the stock is more undervalued.

Comparative Value

Let's demonstrate the PEG ratio with an example. Say you are interested in buying stock in one of two companies. The first is a networking company with20% annual growth in net income and a P/E ratio of50. The second company is in the beer brewing business. It has lower earnings growth at10% and its P/E ratio is also relatively low at15. (There are many other common ratios to use when comparing stocks, such as the P/S ratio. )

Many investors justify the stock valuations of tech companies by relying on the assumption that these companies have enormous growth potential. Can we do the same in our example?

Networking Company:

• P/E ratio (50) divided by the annual earnings growth rate (20) = PEG ratio of2.5

Beer Company:

• P/E ratio (15) divided by the annual earnings growth rate (10) = PEG ratio of1.5

The PEG ratio shows us that, when compare to the beer company, the always-popular tech company doesn't have the growth rate to justify its higher P/E, and its stock price appears overvalued.

The Bottom Line

Subjecting the traditional P/E ratio to the impact of future earnings growth produces the more informative PEG ratio. The PEG ratio provides more insight about a stock's current valuation. By providing a forward-looking perspective, the PEG is a valuable evaluative tool for investors attempting to discern a stock's future prospects.

(Every investor wants an edge in predicting a company's future, but a company's earnings guidance statements may not be a reliable source.)