Skip to main content

P/E ratio

Price to earnings is an important ratio to look at for any share. normally share price = p/E * EPS( earnings per share= net profit/total number of shares). but think invert like Charlie Munger that where can we go wrong to look at only P/e for valuation.

     The first point is Net profit which is easy to manipulate  therefore if management is not ethical then they will manipulate their profit by anything. for example they will reduce their share capital (share dilution) or take much debt for increasing profits." check share capital for last ten years and borrowing, ROE"

      Secondly, when any company can benefit from any situation which is not for the long term but one quarter or year only. for example, oxygen companies benefited from a pandemic then suddenly earnings will go up and p/e look attractive or another reason behind that sector will not do well then value migration happens. for example, Castrol is a good company but when EV comes Castrol will not play an important role. therefore, p/e looks attractive. normally people tell this as "value traps". " Check last ten years of revenue if sudden increase then go through management discussion"

     Thirdly, If free cash flow( cash from the operation - used for CAPEX (capital expenditure)) is used for driving the earnings then high p/e stock will do better. for example, the p/e of Amazon is 300 for many more years however stock goes 100x+. In simple terms, free cash flow means your savings account balance which is used to buy things rather than taking a loan(debt) from a bank or father(equity).  "check capex part, marketing or operating efficiencies from where companies will generate free cash flow"

           Overall, we can not depend on only one valuation matrix rather than we can think about others also but p/e is a good starting point to value any company

Comments

Post a Comment

Popular posts from this blog

No More 'Buy and Hold' – Try 'Buy and Monitor' for Better Investments

Ever wonder how some people consistently make more money in the stock market? It's not magic – it's a mix of paying attention and making smart choices. Let's explore the simple tricks these successful investors use to get better returns than the average. Listen to Insiders: What They Know Matters Successful investors keep an ear out for insider trading updates. Why? Because if someone inside a company is buying or selling their own company's stock, they might know something good or bad is coming. Buybacks & Rights Issues: Company Confidence and Cash In Smart investors like it when companies buy back their own shares or offer existing shareholders the chance to buy more at a discount. It's like the company saying, "Our stock is a good deal!" IPOs & Big Corporate Announcements: Ride the Wave of News Beyond new companies going public (IPOs), successful investors pay attention when companies make Corporate   big announcements. Events like demergers, me...
Post a Comment
Read more

Chemcrux Enterprises

Rural areas offer a more favorable environment compared to metropolitan cities. During my second wave of COVID vacation, I had the opportunity to spend time in my hometown and I discovered that it was a source of great inspiration and ideas. Although I have always been intrigued by stock market books, most of the ones I came across were from Western countries. This led me to search for books specifically focused on the Indian stock market, and that's when I came across an incredible book titled "How to Avoid Loss and Earn Consistently in the Stock Market" by Prasenjit Paul. I read the entire book during my journey from my hometown to Ankleshwar and upon finishing it, I was deeply moved by his story. While I generally have an independent mindset when it comes to my investments, I find myself giving a second thought to stocks recommended by individuals like Prasenjit Paul. What type of company makes wealth for shareholders? About Chemcrux Enterprises is a Gujarat-based comp...
Post a Comment
Read more

FAANG

  This is a popular short name for the world's largest companies (F=facebook, A=Apple, A=Amazon, N=Netflix, G=google). I believe that they are not providing us basic needs in life. If we stay away from that, then we can save a lot of money, time, and attention, and, more importantly, we can save our economy.                 Facebook is  much more costly as attention and time. Amazon is costly as extra shopping or marketing. Google is costly as retained knowledge. and Apple is expensive for our wallets. Netflix can be expensive at time .
Post a Comment
Read more