Friday, December 12, 2014

P/E Ratio: Hidden Meaning
I have often spoken about Ashok Leyland Ltd (Rs.50.45; P/E: 53.67) and Eicher Motors Ltd (Rs.14051; P/E: 74.83) having high (abnormal) P/E ratios, in various platforms including this blog. And then cautioned long terms investors against accumulating these counters, without proper research. Right?

But, what is PE Ratio? It is current price of one share divided by earnings per share. For example, a stock that has a P/E ratio of 25, indicates that it will take 25 years of a company’s earnings, proceeding at the current rate, to add up to the original purchase price. Wow!! Did you ever think of this aspect also?

And, therefore, when a company has P/E of 50 plus, then what does it tell us? Have you ever thought, what will be your age, after 50-plus  years, when you would get the real value of  your investments? Well I can guess many have not while purchasing such shares, as they are mostly guided by the Tip-providers or by the FREE advises (they get in electronic and print media). 

However, a high PE Ratio, sometimes does indicate that majority of the investors expect very high  growth in a company’s earnings in the future. Or market feels that some sectors could show stupendous growth trajectory in future. 

But, many a times this chart of "Over-optimism'" goes  upside down as it happened in case of Suzlon Energy Ltd, once the "Blue-eyed-boy" in the 'Green Energy Space". And then what happened? Yes, the story of Humpty Dumpty was  re-visited.

Who were pioneers in this kind misleading campaigns--mostly the TV--analysts or SEBI-registered marketmen. 

Now also, the same thing  has started. Therefore, think twice before jumping your guns on the high P/E companies. 
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