The first, important thing is that PE is a very good measure. if you are doing a relative comparison between similar stocks of the same industry then, an excellent case would be the IT industry. for example, if you are looking for something like TCS with Infosys or Wipro. want to compare things it makes sense to guess what is the PE of these three stocks. if you get some odd figure for example, if you find that TCS’s PE is 65 hypothetically speaking and Infosys at 23. So you should do further analysis to identify why it is that TCS is being assigned such a high growth factor.
So this is the first major utility of looking at the PE ratio. The second major utility of the PE multiplier is that sometimes you see really odd PE multiplier. you must be suspicious about such companies.
What is PE Ratio for Stocks
The classic case is Nayka and here if you take a look at the stock Pay it is trading at 1091. Now that’s some crazy number until you believe that Nykaa is going to put on a performance like this. The tremendous growth that it’s going to break all the world’s records. so perhaps this valuation is understandable. but to make a long story short you don’t need to be a mathematician and financial genius to understand that 1091 pay multiples. Makes sense from a valuation perspective. Let me quickly clarify I think Niykaa’s business is great, but unfortunately to my understanding, it looks like an overpriced stock. so I stayed away from it. not because there is something fundamental in business, just because of the fact that valuation is so rich that’s why. it’s the second utility of PE.
How to Identify Good Stock with PE Ratio?
For example, if you take a look at cash flow-based companies, then here PE ratio is more sensible to judge. a classic case is why something like Hindustan Unilever or Nestle or something like Pedelight or Procter & Gamble? Because the growth of business here is very Estimated. so this earnings thing is pretty predictable. so the PE ratio is somewhat logically assigned. but on the other hand, if you’re looking at tech companies it’s really unpredictable to forecast growth for tech companies. This is notoriously difficult to do, so pay multipliers assigned to technology companies are pretty much meaningless. because it’s nearly impossible to define exactly how much money a particular tech company is going to make.
For example, if Apple launched iPhone 15, if the iPhone 15 sales are good then Apple is going to make a crazy amount. which in turn depends on the brand value that the technical specifications. have been made whether the technology will be a hit or not. Or a mess so if you take a look at the cash flow then on the other hand it’s very hard to predict these things for a tech company-based business. how much soap is going to sell estimating that demand is pretty easy And so it’s very easy to multiply these earnings in terms of cash flow-based businesses? but not in tech businesses. Now if you start talking about the next- common technology like UEPath or Shopify and how their business model will evolve. so Pay just becomes like a khyali casserole. so there’s no head or foot to that particular number. When it comes to estimating the business models of these tech-based companies. the obvious question is: if PE is so bad what should we do rather is number a specific number So we can boil down our buy and sell decision. unfortunately no, you cannot automate the process of buying and selling stocks. If it was so simple that they sell more than 30 go, buy it if less than 30 go then no analysis is needed in the stock market. but now how does it work let’s take a look at these three specific factors.
For number one example take a look at macro growth. India is a growing country and it has the potential to grow faster than some of the other contries. if India grows faster than projections then a complete re-rating of India’s PE Will be This is the first important thing that you should do to predict whether India is going to grow or not. the second important thing is that whatever industry stock you are trying to pick, you should also do a sectoral growth analysis to see if that sector is going to grow. or if that industry is growing then it is a sunrise industry and it will be assigned a high PE. third and finally the firm you are investing in, how it’s growing. its profitability is not only revenue, so if profitability For example if it is launching more products then it is expanding into new geographies. As long as these three things keep happening, a very high pay stock will continue to give you excellent growth.
Industry and PE Ratio
No problem in terms of stock prices, which brings us to a very short discussion that three industries. Which are the ones where I think higher PE will be assigned in the future and three industries where I think there will be PE contraction. so let me just give you a very quick note, very briefly. so the three industries where I think the PE expansion is likely to happen in India, number one is EMC and insurance businesses. Already very high profitability of AMCs Well, you can go and check the balance sheet. look at the operating profit margin of AMC companies. you will be surprised by the profitability of EMC companies. so I am quite optimistic about these companies. the same goes for insurance because the Insurance industry as a whole is growing. I am also excited about the insurance sector in India as their profitability will also improve. the second major industry I think if there are some crypto-based organizations in India then I will invest in them or proxy in them. I will invest because crypto as a whole will continue to grow despite regulations in India. why is it that you would do this class B?
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