Definition of PE ratio in stock market

PE ratio, stock market

Definition PE ratio

When investing in stock, PE ratio is a widely used tool for stock selection. PE ratio is calculated by dividing the current stock market price by Earning per Share (EPS). It delivered the idea to the investor what the market is going to pay for the company’s earning. It is also viewed as how the stock is valued in the market.

Generally, high pe ratio of the stock is considered as market participants are bullish on this stock. Low P.E. ratio is considered as an undervalued stock, so market participants are not too bullish in these stocks. This function is always not true for the various industry to industry. In some cases, many sectors have low PE ratio like. diamond, fertilizer. FMCG, pharma and LT sector always deliver high PE.

The formula of PE ratio :

Stock price/ Earning per share

Example :

if the current price of the stock is 200 and EPS is 10 what will be a PE ratio?

PE ratio= 200/10

PE ratio =20

Leave a Reply

Your email address will not be published. Required fields are marked *