Skip to main content

Investment Basics - What is P/E Multiple ?

The Price/Earnings Multiple.

If the Price to Earnings Multiple (P/E) were to be judged by usage, it wins easily compared to any other valuation metric, that are available. It is easy to compute, can be applied across companies and across sectors, with a few exceptions. What is this ratio, how is it computed, and how to use it are questions to which you will find answers here !.

What is a P/E multiple?

The P/E multiple is the premium that the market is willing to pay on the earnings per share of a company, based on its future growth. The ratio is most often used to conclude whether a stock is undervalued or overvalued. The P/E is calculated by dividing the current market price of a company's stock by the last reported full-year earnings per share (EPS). In effect, the ratio uses the company's earnings as a guide to value it.

A variant of the P/E - called the Forward P/E - has also been developed wherein the current market price of the stock is divided by the expected future EPS. The attempt to study P/E ratios in this manner reflects the effort to factor in the expected growth of a company.

How is a P/E multiple used?

P/E multiples reflect collective investor perception regarding a company's future. This perception is a function of various factors, like industry growth prospects, company’s position in industry, its growth plans, quantum change expected in sales or profit growth, quality of management, and other macroeconomic factors like interest rates and inflation.

Is a stock trading at a P/E of 30 more expensive than a stock trading at a P/E of 40?

Such a wide variation in P/E multiples can be owing to a few reasons. If the companies are in the same industry, it could be that the company with a high P/E may be one with superior size and financials, with better prospects or even better management. The market expects this stock to outperform its peers. If they are from different industries, it could also be due to different growth prospects.

Besides different expectations regarding future earnings growth, some of the difference in P/E can also be attributed to the disclosures made by the management to their shareholders. Hence, qualitative factors like transparency, quality of management also impact a stock's P/E.

Stock prices, in isolation do not give any indication whether the stock is undervalued or overvalued. They have to be viewed along with the company's future prospects to arrive at any conclusion. Generally, higher the expected growth in a company's earnings, higher is the P/E multiple that it attracts in the market. The time period used for P/E calculations depends on the investment horizon of the investor and would be different for each investor. However, P/E multiples cannot be applied to loss making companies since they do not have any earnings, as such.

Popular posts from this blog

What is Gold ETF - Gold Bees, Reliance Gold,Kotak Gold

What is Gold Bees or Gold ETF?

Gold ETFs are open-ended mutual fund schemes that will invest the money collected from investors in standard gold bullion (0.995 purity). The investors' holding will be denoted in units, which will be listed on a stock exchange.They provide returns that would closely track the returns from physical gold in the spot market.

An investor can buy and redeem the units either directly from the mutual fund or from the stock exchange.Presently there are many Gold ETFs traded in NSE India. Some of the listed Gold ETFs are GoldBees,Reliance Gold,Kotak Gold,UTI Goldshare

Why choose Gold?
Gold holds its own in any investment evaluation on its strengths as a hedge against inflation, value in the event of political uncertainties and its traditionally negative co-relation with other asset classes such as stocks, fixed income securities and commodities.

The value of goods and services that gold can buy has remained stable unlike currencies that have seen significant…


NIFTY BEES - is the first ETF (Exchange Traded Fund) in India, which seeks to provide investment returns that closely correspond to the total returns of securities as represented by the S&P CNX Nifty Index. It gives you the most diversified exposure at lowest possible unit size. Approximately value of Nifty bees will be 1/10th value of the prevailing Nifty price.

ETFs are one of the latest financial innovations and any new concept takes time to be known widely. Globally it took more then five to seven years before it could be of any significant size. In India, it was introduced with Rs 21 crore in size , a fraction of the mutual fund industry, it has come far with more than Rs 700 crore in size with six ETFs.

The Nifty BeES also scores over other index funds due to its low tracking error and expense ratio, apart from easier tradeability as it is listed in the NSE. One can also consider doing an SIP in Nifty BeES.

Some of the reasons to invest in Nifty Bees : Investing in Exchange …

Your Bill Amounts Are Going To Increase From June 1, 2016

Service tax is a tax levied by the government on service providers on certain service transactions, but is actually borne by the customers. It is categorized under Indirect Tax and came into existence under the Finance Act, 1994. Union Finance Minister, Arun Jaitley, in his budget announcements proposed to impose a cess, called the Krishi Kalyan Cess, @ 0.5% on all taxable services. The present rate of service tax will be hiked to 15 per cent from June 1, 2016, from 14.5 per cent. Take a look at what gets expensive:

Phone Bills: Your phone bills are going to go up. So, pay a good 15 per cent now on service tax on phone bills.

Restaurant Bills :If you are dining in a restaurant that already has service tax applicable, you are going to pay more on your eating out. Though 0.5 per cent on a single bill may not mean much, frequent diners may end-up paying a lot during the year.

Travelling: You will have to pay more for air travel, as there is a service tax on tour operators and travel agents.