Factors To Consider Before Investing In Stocks with the Highest PE Ratios
A PE ratio is a metric that measures the price-to-earnings ratio of a company. The higher the PE ratio, the more expensive a stock is compared to how much it's earning. The most common method for calculating a stock's P/E ratio is to use its market value divided by its earnings per share (EPS).
Here are a few factors to consider before investing in stocks with a high PE Ratio-
Understanding What Is High Pe Ratio
The PE ratio is a measure of a stock's price-to-earnings (P/E) ratio, which uses the current price per share and earnings per share to calculate market value. The higher the PE ratio, the more expensive the stock is relative to its earnings.
A higher PE ratio indicates that investors pay more for each dollar of earnings than they earn back in dividends or cash flow. So, if a company has a low P/E, but its stock is trading at a high price, it may be worth considering whether the company's business model can support that level of stock price.
Factors that Influence the P/E Ratio Of a Company
Several factors influence a company's P/E ratio-
- Market Capitalization (MC)
- Earnings Per Share (EPS)
- ROE
- Profitability
Understanding the Calculation Of the P/E Ratio
It's not easy to understand the calculation of the P/E ratio, but it's essential to understand it to invest in stocks with high PE ratios.
The P/E ratio is the ratio of the share price of a company’s stock to its earnings per share (EPS).
Mathematically,
P/E Ratio=Share Price/Earnings per share (EPS)
Earnings per Share, or EPS, is the ratio of a company's total earnings to the number of outstanding shares.
Mathematically,
EPS=Overall earnings of the company/Total number of outstanding shares
The P/E ratio can help you understand if the market price of a share is by the company’s profits.
Stocks with the Highest PE Ratios: Overview
1) Pidilite Inds.
Pidilite Industries Limited is an India-based company engaged in consumer and industrial speciality chemicals. The Company operates through two segments: Consumer & Bazaar (C&B) and Business to Business (B2B).
The C&B segment sells products mainly to end consumers, which are retail users, such as carpenters, painters, plumbers, mechanics, households, students, offices, and others. Its sales consist mainly of adhesives, sealants, art and craft materials, and construction and paint chemicals.
2) ITI
ITI Limited is an India-based company that is primarily engaged in the business of manufacturing, trading, and servicing telecommunication equipment and rendering other associated/ancillary services.
The Company’s manufactured electronic products include intelligent energy meters, mini personal computers, three-dimensional (3D) printing, bank automation products, gigabit Ethernet passive optical network (GPON) optical line terminal (OLT), and optical network terminal (ONT), pulse-code modulation (PCM) multiplexers, ruggedized telephones for defence forces, intelligent cards and banking cards, handheld terminals for smart card authentication, set-top boxes, wireless fidelity (Wi-Fi) equipment, and so on.
3) Chandra Bhagat
Chandra Bhagat Pharma Ltd is an India-based medicine company. The Company is engaged in marketing pharmaceutical formulations and products in domestic and international markets through its brand's distribution network and sales force.
It provides a range of products portfolio of pharmaceutical formulations, including injections (ampoules, vials, prefilled syringes, lyophilized vials), tablets, capsules, and oral syrup.
4) Active Clothing
Active Clothing Co Limited designs, manufactures, and retails readymade garments and apparel. The Company has three product categories, such as Jackets Division, Flat Knits Division, and Circular Knits Division.
It produces various kinds of garments in multiple styles across three categories: flat knit sweaters, outwear jackets, circular knit t-shirts, sweatshirts, and joggers for men, women, kids, and babywear.
5) Kemp & Co.
Kemp & Company Limited is an India-based company engaged in dealing in real estate, investments, and trading in hard and soft luggage. The Company's segments include Trading Activity, Real Estate, and Unallocated. The Real Estate segment includes letting out properties.
The Trading segment includes retailing plastic moulded suitcases, briefcases, vanity cases, and other travel goods and accessories. The Company also owns commercial property located in Mumbai.
Conclusion
The stocks above are some of those that have had high PE Ratios over the past time. Invest in such stocks after careful research and analysing of your risk appetite.
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.
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Research Analyst - Bavadharini KS
