Don't Buy a Stock Until You Read This: What are PE ratio/ PB/ ROE/Book Value?

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The P/E ratio is the relationship between a company's stock price and its earnings per share (EPS). It indicates how much investors are willing to pay for each dollar of a company's earnings. You will get everything in this book, the best trading book for beginners

$$\text{ P/E Ratio}=\text{Earnings Per Share (EPS)/}$$Current Stock Price

For example, if a company's stock price is Rs 100 and its Earnings Per Share (EPS) is 2, its P/E ratio is 50. This means investors are paying 25 for every 1 of the company's earnings.

    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:

  $$P/BRatio=\frac{\text{Market Price per Share}}{\text{Book Value per Share/}}$$

• 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.

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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. 

• $$ROCE=\frac{\text{Earnings Before Interest and Taxes (EBIT)}}{\text{Capital Employed}}$$

  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

• $$\frac{\text{ROE=Shareholders’ Equity/}}{\text{Net Income}}$$

• • 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.

• $$\text{Book Value}=\text{Total Assets}-\text{Total Liabilities}$$

•  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.

• $$\text{Debt to Equity Ratio = Shareholders ’}\frac{\text{ Equity/}}{\text{Total Debt}}$$

• • 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. 

• $$\text{Dividend Yield}=\genfrac{}{}{0ex}{}{\text{ Dividend per Share}}{\text{Current Stock Price per Share/Annual}}$$

• 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.