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Explanation: The Price-to-Earnings (P/E) ratio compares a company’s current market price per share to its earnings per share (EPS), providing insight into how much investors are willing to pay for each unit of earnings. A lower P/E ratio may suggest undervaluation, while a higher ratio may indicate overvaluation.
How it helps in investment decision making:
Valuation Assessment: Investors use the P/E ratio to assess whether a stock is priced fairly relative to its earnings potential. A lower P/E ratio may indicate that the stock is undervalued, potentially presenting a buying opportunity, while a higher P/E ratio may suggest overvaluation.
Comparison with Peers: Investors compare a company’s P/E ratio with those of its industry peers to gauge its relative valuation. A lower P/E ratio compared to competitors may suggest that the company is undervalued within its industry, making it an attractive investment opportunity.
Historical Analysis: Monitoring changes in a company’s P/E ratio over time allows investors to track trends in valuation. Significant deviations from historical P/E ratios may signal shifts in investor sentiment or changes in the company’s financial health.
Example: TCS has a P/E ratio of 33.80 as of FY23. This indicates that investors are willing to pay approximately 33.80 times the company’s earnings per share. Analysing this ratio helps investors evaluate TCS’s valuation relative to its earnings performance and make informed investment decisions.
You can view P/E Ratio for any company over time on Radar under Valuation Ratios in the Ratios section.