Did you know how important is P/E(Price to Earnings) Ratio for stock investors?

The P/E Ratio known as the “price to earnings ratio” will give an idea of how shareholders/market is valuing the company (share price) to its earnings (Net profit). In other words, how many times does the market value the company’s latest annual net profit? Eventually, the P/E ratio will increase or decrease depending on the increase/decrease in the company’s earnings.

The P/E ratio is important to investors rather than traders, as traders can only speculate according to trends and market demands. However, investors must look into the future revenue growth and sectoral P/E ratio and how a company's P/E ratio will differ according to the company's prospects. This is essential for good profitability. Each sector's average P/E ratio will differ, for example, Mr. Market will give P/E for FMCG around 60 – 80, whereas IT stock's average P/E ratio is around 35-45. Whereas future growth-oriented sectors like green energy & Power sectors are valued by Mr.Market around 120 – 150. So, for investors it is necessary that they forecast the net revenue of a company for the next 3-5 years & look into the current and forecast future P/E ratios, in such a forecast for the next 5 years, if 3 year’s P/E comes less than the sectoral P/E the stock belongs, then the stock is giving green signal for an investor to consider the stock. There is an illustration of how an investor can check for a 5-year forecast and decide on investing based on the P/E ratio – the illustration will have NCC’s last 5-year details. However, this way of valuation is just an illustration & educational purpose only & investors should forecast net income instead of this illustration which has past data.

Investors can always check with a sebi registered advisor for guidance before investing.

Illustration of P/E ratio change in NCC for last 5 years

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