Don't Misinterpret P/E Ratio In Wrong Way

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Value For Money

• People always want more value as compered to the price they pay.
• Here the concept of margin of safety comes into the picture, like if a value of stock is 100 rupees and the price is 80 rupees so we usually say it is undervalue and the margin safety is of 20 rupees.
• P/E Ratio :

How People Interpret P/E

• Many people while analysing PE ratio thinks that it is a uniform metric which is applicable for all different companies in different sectors and people compare PE of two different companies from two different sectors.
• It is generally believed that every low PE ratio company is cheap and every high PE company is Expensive
• Low P/E Stock :

• High P/E Stock :

Where We Should Not Use P/E Ratio

• When we are studying the companies like Tata Steel which are consider cyclic stock or a commodity driven business have heavy fluctuations the P/E Measurement is not that effective because there are heavy and no earnings in some periods so P/E expands and contract.

When should we consider using P/E Ratio

• When we are analysing the P/E ratio we should consider the companies which have a normalized earnings like

Re-Rating In P/E Ratio

• Here the P/E break its long time range and shifted in upward or downward direction and start with new range

Contraction of P/E When Price Is In same Range

• If we consider the stock of D-mart where the price of stock has been in a same range but the P/E of stock has slowly contracted
• Price Range :

• P/E Contraction :

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