PE Ratio

#killthejargon

PE Ratio shows what the market is willing to pay today for a stock based on its past or future earnings and helps in estimating a stock’s market value & future earnings growth.

Ok, but what do I do then?

To determine whether a stock is overvalued or undervalued, it should be compared to other stocks in its sector or industry group.

In most cases, an industry group will benefit during a particular phase of the business cycle.

Here’s how you can understand the use of PE ratio as a key metric to manage your portfolio!

After the recent highs, as markets start to correct once again, the conversations around valuation have resurfaced. But before you decide to change your allocation based on whether the market is expensive or not, looking at the price-earnings (PE) ratio can help assess valuation.

The PE of two portfolios can be different depending on the type of stocks they hold. For example, if you have invested in a large-cap fund, the PE can look lower compared to a small- and mid-cap fund. So never compare dissimilar portfolios.

The PE ratio by itself says little, you have to associate it with an industry, a portfolio and its historical trend to arrive at a relevant conclusion. For Eg — Currently, the Nifty PE is 22x. If your portfolio PE is higher than 22x, this may indicate that your portfolio consists of growth stocks.