How to calculate P/E ratio
Let us understand what is the P/E ratio
The P/E ratio is the valuation tool that compares a company’s stock price with its earnings per share. It offers insight into investor’s perception of the company's earnings potential and overall market sentiment toward the stock.
A high P/E ratio can mean a stock's price is high relative to earnings and possibly overvalued.
A low P/E ratio might indicate that the current stock price is low relative to earnings.
CALCULATING THE P/E RATIO
To calculate the P/E ratio, Divide the current stock price by the company’s earnings per share (EPS). The Formula is :
P/E Ratio = Market Price Per Share/ Earning Per Share
Here,
Price per Share: This is the current market price of a single share of the company's stock.
Earnings per Share (EPS): This is the company's net income divided by the total number of outstanding shares.
For Example: Reliance Industries Ltd. stock is trading at ₹2905 per share, and its EPS is ₹103, the P/E Ratio would be 28.3.
Different types of P/E ratios
Trailing P/E Ratio: This ratio Considers the company’s past earnings over the last four quarters. Trailing P/E ratio also known as Historical P/E ratio.
Forward P/E Ratio: The forward P/E ratio estimates the future earnings for the next four quarters.
Using the P/E ratio
For comparing the P/E ratio: Investors can compare a company’s P/E ratio with its industry peers or assess the relative valuation.
Industry and Market Trends: Analyzing the P/E ratio across industries and the Indian market can help investors identify sectors that may be overvalued and undervalued.
Conclusion
The P/E ratio is a crucial metric for investors, providing valuable insight into a company’s valuation and growth expectations. By combining a company’s fundamentals, growth prospects, and broader market conditions, will help Indian investors make informed choices in their stock investment journey.