Updated: Sep 17, 2020
Hello friends, today we will know about an important aspect of Fundamental Analysis (P/E ratio). P/E ratio full form is (Price to earning) straightforward, it means How much profit a company is making from the money of equity. And before you understand it well you answer a question? : –
1. The price of a company (ABC) is one lakh And this company is giving you one thousand rupees every year.
2. The price of another company (DEF) is fifty thousand. And this company is giving you one thousand rupees every year.
Which company would you like to buy? Try thinking a little later and tell me.
Obviously, we will buy the company (DEF) because that the profits of both companies are equal. But the (def) is cheaper than the company – (abc). p / e ratio only tells this.
How to calculate (P/E ratio) we need two things first stock current price and second EPS. EPS (Earning per share) means how much profit the company is making for a single share. After that, we have to share the stock current price with EPS. We will know from the example of Apple Company.
stock current price – 167
Apple (P/E) Ratio – —————————————– = 16.7 (p/e)
Earning per share (EPS)- 10
If you buy Apple Company’s stock. So you have to spend 16.7 to earn 1 profit. Therefore, higher (P/E ratio) means company is expensive and Lower (P/E ratio means company is value for money.
After looking at the P / E ratio, we will have to see how the company is working as if the company’s profits are not continuously increasing/decreasing.
It is not necessary that the company should always buy a lower (P/E ratio) company. The reason for the lower (P/E ratio) of the company is that the investor’s response may be less. Therefore, we have to buy a company whose (P/E ratio) neither reduced nor more. Others, however, are thinking of buying the company’s stock. You can also compare it with other stocks same industry.
At the end, you want to say this before taking a leave of you. In a fundamental analysis, (P/E ratio) is not enough you this is only a part of fundamental analysis need to attention to other things before buying a stock.