Thread Threadexplaining #PE Ratio & #PEG Ratio & its use in #FundamentalAnalysis

(Must read for #FA learners)

🙏Like & RT to spread learning with all🙏

Views Welcome👉@dmuthuk @Vivek_Investor @datta_arvind @caniravkaria @FI_InvestIndia

#FundamentalAnalysis
#StockMarket

1⃣

Price to Earnings (#PE) ratio, also known as price multiple or earnings multiple is the ratio obtained by dividing the current share price by earnings per share (#EPS).

#StockMarket #Investing #FundamentalAnalysis
2⃣

P/E ratio is a reflection of the market's opinion of the earnings capacity & future business prospects of a company.

Companies which enjoy high investor confidence & have a higher market standing usually command high P/E ratio.

#StockMarket #Investing #FundamentalAnalysis
3⃣

On the face, it would seem that companies with low P/E ratios would offer most attractive investment opportunities. This is not always true.

Companies with high current earnings but dim future prospects often have low P/E ratio.

#StockMarket #Investing #FundamentalAnalysis
4⃣

As an #investor your primary concern is with future prospects of a company & not so much with its present performance.

This is why companies with low current earnings but bright future prospects usually command high P/E ratio.

#StockMarket #Investing #FundamentalAnalysis
5⃣

Better to invest in a stock with P/E ratio of 30 having good future growth prospects rather than investing in a stock having low P/E ratio of 5 or 6 but has an uncertain or bleak future growth prospects.

But at the same time never buy companies with too high valuations.
6⃣

Hence its always advisable to judge #PE ratio in conjunction with prospects of future earnings & growth of the company. This can be done using P/E ratio in conjunction with #PEG ratio.

@caniravkaria @Arpit1223 @FI_InvestIndia

#StockMarket #Investing #FundamentalAnalysis
7⃣

Price/Earnings to Growth (#PEG) ratio is calculated dividing company’s P/E ratio by growth rate of its earnings for a specified time period.

#StockMarket #Investing #FundamentalAnalysis
8⃣

PEG ratio gives a better picture about valuation of a company as compared to P/E ratio since it takes into consideration the company's earnings growth.

#StockMarket #Investing #FundamentalAnalysis
9⃣

In case of companies having high growth rates, their P/E ratio might be high & in such cases using just P/E ratio these high-growth companies would appear overvalued relative to others & in such cases better to use PEG ratio to get clear picture about company’s valuation.
🔟

#investor can use PEG ratio to know if a stock is overvalued or undervalued.

✅PEG ratio greater than 1 means stock is relatively expensive.

✅PEG ratio lower than 1 means stock is below its fair value.

✅PEG ratio will be negative when there is de-growth in earnings.
1⃣1⃣

Theory of #PEG Ratio gained it’s popularity when #PeterLynch started using it as one of his valuation metrics.

Peter Lynch would always prefer to invest in stocks whose PEG Ratio was less than 1.20.

#StockMarket #Investing #FundamentalAnalysis
1⃣2⃣

#PEG ratio actually factors-in both price valuation & stock’s future growth prospects.

If handled correctly, PEG can prove to be a reliable intrinsic value pointer.

#StockMarket #Investing #FundamentalAnalysis

More from Techno Funda Investing

More from Accounting

Building conviction on existing portfolio stocks is complex topic. I am still learning and have only 2-3 years exp. Lot of learning is inspired from @varinder_bansal as part of omkara family, listening to old colleage @connectgurmeet on news channel and @unseenvalue posts

https://t.co/KQkupOeFzp financial statements and results on quarterly basis to evaluate whether your thesis on company is still intact through growth in revenue, profits and cash. You cannot rely only on whats app forwards or brokerage updates.

2.Quarterly Con-Calls post result covering enviornment of the sector in which company operates, future expansion plans, & companies confidence in responding to fund managers. (For eg, in my evening walks, i listen to con-calls on You tube rather than music to utilize the time.)

3. High conviction is build when you compare py qtr or py year con call scripts and see whether company giving forward statements were met in subsequent quarters or not. For eg company said they will be doing CAPEX for 100 crores in FY 2020 and then we can see current state.

4. Profits not growing qtr or qt or yr on yr is not the sign for low conviction. You need to screen the balance sheet to see if the company has taken huge R&D expenditure which they believe is right for company as they build new products for future years, then that make sense

You May Also Like