The Price to Earnings ratio is by far the most well-known financial measure. Investors regularly examine a stock’s P/E, and due to its overwhelming popularity, it can be labelled as the ‘financial ratio star’.
To understand the P/E ratio, it is important to comprehend the Earnings Per Share (EPS). The calculation of the P/E involves dividing the current stock price by this figure.
To work out this company’s earnings per share (EPS), you would divide the total profit of Rs.200000/- by the number of shares outstanding, which is 1000. This gives a result of Rs.200/- earnings per share.
=200000 / 1000
= Rs.200 per share.
Therefore, the EPS gives us an understanding of the profits earned per stock. The higher it is, the more beneficial it will be for those investing in it.
The Price-to-Earnings ratio (P/E) is a way of measuring how much market participants are willing to pay for a stock based on its earnings. For example, if a firm’s P/E rate is 15, it signifies that investors are ready to part with fifteen rupees for each rupee of profit the company earns. Generally speaking, stocks with higher P/Es are more expensive.
Let us calculate the P/E for ARBL.
PAT = Rs.367Crs
Total Number of Shares = 17.081 Cr
PAT divided by Total no. of shares = EPS
= 367 / 17.081
Current Market Price of ARBL = 661
Hence P/E = 661 / 21.49
= 30.76 times
For every unit of profit ARBL produces, investors are prepared to offer Rs.30.76 for its stock.
Assuming ARBL’s price jumps to Rs.750 while the EPS remains constant at Rs.21.49, the P/E would then be 34.77.
= 34.9 times
The EPS remained unchanged at Rs.21.49 per share, yet the stock’s P/E increased; what do you think caused this?
The P/E Ratio grew in line with the stock price as expectations for the company strengthened.
Keep in mind that the P/E Ratio is calculated using ‘earnings’. It is essential to keep certain factors in mind when examining this figure, such as:
– The Index Valuation
The price-to-earnings (P/E), price-to-book (P/B), and dividend yield ratios are crucial in determining the valuations of stock market indices such as the BSE Sensex and CNX Nifty 50. Exchanges typically provide updates of this valuation on a daily basis, giving us an indication of how costly or affordable the market is trading at. To calculate the P/E ratio for the CNX Nifty 50 Index, The National Stock Exchange adds together the capitalisation amount for all fifty stocks before dividing it by the combined earnings of these stocks. Monitoring this figure gives us insight into the sentiment of market players.
Take note of the following points:
After examining the evidence, it seems clear that a few important conclusions can be drawn.
The Index P/E can be easily located on the National Stock Exchange website daily.
To access historical data for P/E, P/B, and Div ratios on the NSE website, navigate to the homepage and follow the path: Products > Indices > Historical Data > P/E, P/B & Div > Search.
In the search field, simply type in today’s date to get the most recent P/E evaluation of the market. Remember that the NSE renews this data at 6:00 PM each day.