P/E Ratio : ( Price / Earnings per share )Ratio.
- The fundamental rule is you only want to invest(i.e buy a part of a company) in company which is going to make good and sustainable profits. => we want the earnings to be very high =>Denominator of the above ratio should be high => buy those with small P/E value
- Higher P/E implies means either the stock is very expensive or people estimate this company will do very well. There by they are putting more money to get little earnings => Long term companies..
- From Wikipedia “For example, if a stock is trading at $24 and the earnings per share for the most recent 12 month period is $3, then stock A has a P/E ratio of 24/3 or 8. Put another way, the purchaser of the stock is paying $8 for every dollar of earnings. Companies with losses (negative earnings) or no profit have an undefined P/E ratio (usually shown as Not applicable or “N/A”); sometimes, however, a negative P/E ratio may be shown.”
- A low P/E may indicate a “vote of no confidence” by the market or it could mean that the market has just overlooked the stock. Many investors made their fortunes spotting these overlooked but fundamentally strong stocks before the rest of the market discovered their true worth.
- The P/E tells you what the market thinks of a stock. It tells you whether the market likes or dislikes the stock. Higher P/E means - people think this company is great to be in. Lower P/E means people have overlooked the stock price and dont value it more. If you can find of those companies which are having lower P/E today and buy them and when eventually market realizes it, P/E increase and you have made a fortune.
- EPS = Net Earnings / Outstanding Shares - Comparing the earnings would not make sense. Just because a company has higher earnings then the other does not mean it is good. It also depends on the number of shares the company has in the market. For example, companies A and B both earn Rs.100, but company A has 10 shares outstanding, so each share holder has in effect earned Rs.10.
On the other hand, if company B has 50 shares outstanding and they too have earned Rs.100 then each shareholder has earned Rs.2. So you see it is important to know what is the total number of outstanding shares are as well as the earnings. EPS does not tell you anything about what people think of the company. For that we need to look P/E ratio. ==>Conclusion : Higher EPS is better earnings. - In conclusion, the P/E tells you what the market thinks of a stock. It tells you whether the market likes or dislikes the stock. => Higher EPS => Lower P/E
- Consider Brokerage fees as part of your gains - Every 10,00,000 you pay 0.04 % minimum ( my broker’s brokerage ) => 40,000 Rs . and another 40,000 for selling assets worth 10,00,000.
- Consider 15 % Tax for short term capital gains tax - India and 0% (> 1 year ) long term capital gains tax that you would have to pay from your earnings.
- Consider 7 % Inflation that reduces the value of your money by 7 % every year if is it locked in a bank. 50 paise my dad could watch a movie, if he saved it till 2009 to see a movie in 2009 -> he could do nothing with it. Inflation ate it all…..
http://en.wikipedia.org/wiki/PE_ratio
http://www.indiahowto.com/pe-price-to-earnings-ratio.html