What is P/E Ratio

Have you heard of P/E (Price/Earnings Ratio)? It is one of the Oldest and most used term when it comes to value of shares. And you know although i heard it several times and also knew what it meant but was never able to figure out how to use it to find out the value of the shares that i was planning to buy.

Any ways i have found some useful information on Price/earning ratio which i am planning to put to good use now. It actually means ratio of the price of a share by the earnings per share. All you need to do to find out the P/E ratio is to divide the price of the stock by the Earnings per Share(EPS). The earning per share is usually for the past four quarters.

Whenever a company is making losses the P/E ratio is negative or sometimes said to be zero. Price/earning ratio tells us how much an investor is willing to pay for the per rupee earning of the share. For example a P/E ratio of 18, the investor is willing to pay Rs.30/- for every 1 Re. earning that the company generates. If a company has a higher P/E ratio it means that the market is generally expecting a good growth in the companies earnings. Stock prices reflect, what the market expects the companies growth to be.

Lets take an example, if everything else being equal and a stock worth Rs.10/- and a P/E ratio of 75 is probably more expensive then a Rs.100/- stock with a Price/earning ratio of 20. Hence we can say that the P/E ratio is much better indicator of the value of the stock then its market price.
Price/Earning ratio is usually lower during the times of inflation. You should never base your buy or sell decisions solely on this ratio.

I have tried to explain in a way i can and the way i found it but is case of any doubts please do get in touch.

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