If PE will down of any company then what happen?

Question

I want grow my knowlege in stock market

Answer 1

The price earnings ratio can help you compare related companies. PE ratio going down in todays market may be because of the stocks price going down, So price to earnings ratio is down. It may also be that the earnings per share have increased substantially, and therefore PE ratio is down!

But leave that query aside, first to understand what is PE ratio and how you should look to use that information in deciding whether a stock is cheap, fairly priced or expensive, and how it allows you to compare with other companies in the sector. Read on.... from this article excerpt at about.com.......

Value investors have long considered the price earnings ratio (p/e ratio for short) a useful metric for evaluating the relative attractiveness of a company's stock price. Made popular by the late Benjamin Graham, who was dubbed the "Father of Value Investing" as well as Warren Buffett's mentor, Graham preached the virtues of this financial ratio as one of the quickest and easiest ways to determine if a stock is trading on an investment or speculative basis.

An explanation of the price earnings ratio

Before you can take advantage of this tool, you have to understand what it is. Simply put, the p/e ratio is the price an investor is paying for Re.1 of the company's earnings. In other words, if a company is reporting basic or diluted earnings per share of Rs.2 and the stock is selling forRs. 20 per share, the p/e ratio is 10 (Rs.20 per share divided by Rs.2 earnings per share = 10 p/e.)

Confused yet? No need to be. Most stock-quote systems such as Yahoo! Finance will automatically figure the price earnings ratio if you ask for a detailed quote on any company.

Once you have the magic number, it's time you begin to wield its power. It can help you differentiate between a less-than-perfect stock that is selling at a high price because it is the latest hot-pick on Wall Street, and a great company which may have fallen out of favor and is selling for a fraction of what it is truly worth.

First, you have to understand that different industries have different p/e ranges that are considered "normal". For example, technology companies may sell at an average of 40 p/e, while textile manufacturers may only trade at an average of 8. There are the exceptions, but for the most part, these differences between sectors are perfectly acceptable. They arise out of different expectations for different businesses; tech stocks usually sell higher because they have a much higher growth rate and earn high returns on equity, while a textile mill, subject to dismal margins and low growth prospects, will trade at a much smaller multiple.

One way to know when a sector is over priced is when the average p/e ratio of all of the companies in the industry is far above the historical average. (A sector is a group of companies in a particular line of business; e.g., pharmaceuticals, advertising, utilities, etc.) This could spell trouble. We saw the repercussions of just such a gross-over pricing in the recent technology crash following the dot-com frenzy of the late 1990's. Thus, the investor could have avoided the huge declines in the technology stocks had you sold when you realized the entire industry was dangerously expensive.

Using the p/e ratio to compare companies in the same industry

In addition to helping you determine which industries and sectors are over / under priced you can use the p/e ratio to compare the prices of companies in the same sector against each other. For example, if company ABC and XYZ are both selling for Rs. 50 a share, one is not more expensive than the other. Wrong!

Company ABC may have reported earnings of Rs.10 per share, while company XYZ has reported earnings of Rs. 20 per share. Each is selling on the stock market for Rs.50. What does this mean? Company ABC has a price to earnings ratio of 5, while Company XYZ has a p/e ratio of 2 1/2. This means that company XYZ is much cheaper on a relative basis. For every share purchased, the investor is getting Rs. 20 of earnings as opposed to Rs.10 in earnings from ABC. All else being equal, an intelligent investor should opt to purchase shares of XYZ; for the exact same price (Rs.50), he is getting twice the earning power.

The limitations of the price earnings ratio

Remember, though, just because a stock is cheap doesn't mean you should buy it. If a company's stock price has fallen, do your research and discover the reasons. Is management honest? Are they losing key customers? Look at insider buying. Is the Board of Directors buying stock in the company? If the weakness is across the entire sector or just because of temporary bad news that doesn't change the bottom line, then consider buying.

Read the complete article and check out other useful links here http://beginnersinvest.about.com/cs/valu...

Re: increasing your knowledge about stock market, consider these set of excellent articles at

Great investing basics websites

http://beginnersinvest.about.com/

http://www.investopedia.com/articles/bas...

http://www.kiplinger.com/moneybasics/

Happy Learning!

Answer 2

PE ratio is price and earning per share ratio.

less pe means share is cheap

high pe means share is overvalued.

But it is not everything for calculating fundamentals of a company. higher pe also means people are betting on the company as they have more hope from that company. lower pe also means people are not satisfied about growth of company. But if a company is trading at lower than sector pe  then this may be a good long term bet if other fundamental of company are well on track.

Answer 3

P stands for Price. E stands for Earnings. The PE ratio can also be called the Price/Earnings ratio. It is calculated by dividing the market value of 1 share of a company's stock and dividing it by the company's Earnings Per Share (EPS). The EPS is determined by calculating a company's revenue (total sales) and subtracting all expenses (Labor, parts, administrative, operational etc) and taxes and then dividing this number by the company's total outstanding shares.

Ok, so what does this all mean? The PE ratio gives you an idea of how cheap or expensive a company is. It does not tell you anything else. You can use the PE of a company and compare it to its industry to determine if it is more expensive or less expensive than other companies. A lot of beginning investors look at the stock price of a company and think that the higher a stock price the more overvalued the company is; they are wrong. The higher the PE, the higher the company's valuation. You can also use PE ratio's to determine if an industry or sector is overvalued (ex. tech bubble).

With that said, the PE ratio is just one method of analyzing a company's stock. It does not take into account growth rate, macro economic factors, brand names, etc etc. People who invest or trade purely based on technical factors (not me), will use a wide range of ratios when making their investment decision. I prefer to look at the financial ratios, but also focus on the company's management team.

Answer 4

If PE is low and the earnings estimate is very good then it means that there is good valuation left out in the stock.  One can purchase this stock and wait for very good returns.

Answer 5

hi,

PE=stock price/earnings per share.

1. low PE means: stock is cheap. investors are not betting on the stock.

2. high PE means: stock is costly. investors are betting on the stock.

track the PE of the stock over aperiod of time.

average PE of different sectors varies. so compare within the same sectors.

ALL THE BEST.

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