The P/e ratio is an appealing ratio due to t it’s an easiness to understand in relative to other ratios and can be identified by dividing the current market price of a share to earning per share (EPS) of a company.
1. Company to Company P/e ratio comparison – It cannot be ignored as you cannot find the popularity of shop until you cannot compare it with the neighbour shop of the same category product line. The P/e comparison of two companies is also helping to get the popularity or value of company among the two. A company with lower P/e has a higher potential to gain profits shortly. For eg:- there are two companies denoted by A and B with similar types of products. Company A’s current market price is 100 and EPS is 50 then P/e of company A is 2 (100/ 50 ).
2. Company to Industry P/e ratio comparison – If you go for a shopping to six shops to buy cloth of same quality and find that out of six, five are selling cloth of same quality at the same price and the sixth one is selling at a lower price. What would you like to do? Of course, you ill buy from the sixth shop. Industry P/e ratio is also telling the average price to earnings ratio of various companies in a particular segment and f yu find any company’s P/e ratio is lesser than the industry P/e then it will help to get the better results in a long run. One thing, we need to take care that there should no compromise with the fundamentals of a company while selecting based on lower P/e ratio.
3. Company’s Current P/e ratio to Company’s Historical P/e ratio comparison – The historical P/e is the average P/e of a company for the defined time frame. If the selected company’s current P/e is less than the historical P/e of the defined period then it’s a good deal to buy the company share.
P/e plays an important role in finding the undervalued company but it works best when combined with other ratio analysis.