The P/E Ratio isn’t Everything!

The price-to-earnings ratio is a fairly simple tool for assessing company

value.

Judging by how often the P/E ratio gets touted by Wall Street analysts, the
financial media, and colleagues at the office water cooler it’s tempting to
think it’s a fool proof tool for making wise stock investment choices.

Let’s just think again, Is P/E ratio always reliable? There are plenty of
reason to be wary of P/E based stock valuations.

Well, it’s a common practice among Investors to check the P/E multiple to
understand if the company or the stock is overvalued or not. But it is also
necessary that the P/E multiple is influenced by various aspects other than
just earnings.

Growth Prospects

If there exists a company or a business that has a sustainable growth model

and is positive about their growth in the long term then it is normal that
those businesses and companies would have a higher P/E multiple, in such
case, The stock having a higher P/E could be seen as a positive sign, as
when sustainable growth is met with value investors, they become
unstoppable.

Macro Economics

While the companies deal with their small cap strategy, all those strategies
would stop making any sense and if there are any drastic changes
economically within a country.

For example, if the country’s GDP has tanked down a lot, then it is evident
that any stock would have a lower PE with better pricing or in the case
rupee (INR) if it has plummeted in the global market.

Then you can either tell about the sector and how the business is
sustainable and has good growth prospectus for the future.

Here, we’ve got you some trends that directly affect the P/E multiple, hence
now we believe when one is checking the PE ratio, he/she will not only look
at the numbers but also, look deep into it for better analysis.

Sure, the P/E ratio is popular and easy to calculate. But it has big
shortcomings that investors need to consider when using it to assess stock
values.
One should use it carefully. As no single ratio can tell you all that you need
to know about a stock. Be sure to use a variety of ratios to get a fuller
picture of financial performance and stock valuation.

#growth #P/E ratio #business #finance #stockmarket #valuation