PE Ratio Simplified

PE Ratio is a ratio of a company’s share price to EPS.

PE = Price ÷ EPS

Its an indicator to asses the valuations of any company.

PE of any stock generally bench marked with the PE of industry that stock is into.

A High PE means investors are willing to pay a high price for its future earnings & Vice Versa for a low PE.

Generally, industry leaders command a high PE of a company that grows faster than industry growth gets higher PE.

If a high PE company delivers on expectations it continues to enjoy the same PE, Vice Versa in case earnings mismatch.

If a low PE company delivers better than expected, its PE got rerated for the future & the price goes higher.

Case Study

Why Nifty went up sharply after corporate tax cut announcement?

PE – 26 Price – 10700 EPS – 411

After-tax cut market discounted 10% higher EPS for Nifty stocks that is 450 450 26×450=11700 (Price of Nifty on 21st).

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