Don't Buy a Stock Until You Read This: What are PE ratio/ PB/ ROE/Book Value?
In this article, you will clear each and every doubt related to stock fundamental analysis. Read carefully and share with your friends. Free candle stick and chart pattern PDF
The P/E ratio is the relationship between a company's stock price and its earnings per share (EPS).
What is a "Good" P/E Ratio?
There is no single "good" P/E ratio that applies to all companies.
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2. P/B Ratio (Price-to-Book Ratio)
The P/B ratio compares a company's current stock price per share to its book value per share. It shows how the market values the company's net assets.
Formula:
A P/B ratio of 1 means the stock price is equal to the company's net asset value.
A P/B ratio greater than 1 suggests that investors believe the company's assets are worth more than their book value, often due to intangible assets (like brand recognition) or future growth potential.
A P/B ratio less than 1 can indicate that a stock is undervalued, but it could also signal that the company is facing financial distress or has declining assets.
3. ROCE (Return on Capital Employed)
ROCE is a profitability ratio that measures how efficiently a company uses all its capital (both debt and equity) to generate profits.
Where Capital Employed = Total Assets - Current Liabilities.
A higher ROCE is generally better, as it shows the company is generating more profit for every dollar of capital it uses.
A high ROCE suggests strong management and efficient use of resources.
4. ROE (Return on Equity)
ROE measures how much profit a company generates for every dollar of shareholder equity.
It's a key indicator of a company's profitability from the perspective of its owners (the shareholders A higher ROE indicates that a company is more effective at using shareholders' money to generate profits.
A consistently high ROE can be a sign of a high-quality company, but it should be compared to industry peers.
5. Book Value
Book value is the value of a company's assets minus its liabilities. It's the net asset value that would theoretically be left for shareholders if the company were to be liquidated.
Book value is a fundamental measure of a company's intrinsic worth.
It is often used in the P/B ratio to determine if a stock is trading at a premium or a discount to its tangible value.
6. Debt to Equity Ratio
This ratio measures a company's financial leverage by comparing its total debt to its shareholders' equity.
It shows how much of a company's assets are financed by debt versus by the money invested by shareholders. A high D/E ratio means a company relies heavily on debt for its operations, which can be a sign of higher risk but also potential for higher returns if the company uses the debt effectively.
A low D/E ratio suggests a company is more conservatively financed, relying more on shareholder equity, which can indicate lower risk.
7. Dividend Yield
The dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price.
Meaning:
A high dividend yield means the stock provides a higher return in the form of dividends relative to its price.
It is important to look at the sustainability of the dividend.
An unusually high yield might be a red flag, as it could mean the stock price has fallen or the company might cut its dividend in the future
8. Industry P/E
The industry P/E is the average P/E ratio for all the companies within a specific industry.
When analyzing a company's P/E ratio, it is most useful to compare it to the industry P/E to determine if the stock is overvalued or undervalued relative to its peers.
For example, a tech stock with a P/E of 25 might be considered fairly valued if the industry P/E is 30, but a retail stock with the same P/E might be considered highly overvalued.
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All the terms you listed—"earnings ratio," "p to e ratio," "pe multiple," "pe value," "price earnings," "price earnings multiple," "price per earning," "price per earning ratio," and "profit earning ratio"—refer to the same financial metric: the Price-to-Earnings (P/E) ratio.
A high P/E usually indicates that investors have high growth expectations for the company and are willing to pay a premium for its stock. A low P/E can suggest the company is undervalued, or that investors have low expectations for its future growth.
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