Use of stock valuation tool (Price Earning Ratio – PE) is one of the most used stock valuation tool after EPS. PE ratio is one of those calculations about stock valuation that is easiest to do. In most cases, one need not calculate PE ratio of stocks. It is readily available on internet. Nevertheless, calculation of PE Ratio of stock is simple.
But we must understand well how to effectively use PE ratio for stock valuation. For some, PE ratio of stocks is a complete valuation tool. For others, it serves very little purpose. Due to this varied opinion PE is also the most misused tool. It is true that there is no ratio which speaks as loudly about stock valuation as PE ratio.
But is PE ratio in itself complete, or we must use it in combination with other stock valuation ratios? In this article I will emphasize the importance of low PE stocks as investment vehicle. I will also suggest a method to use PE ratio more effectively. Earning Per Share (EPS) is PAT per share of last financial year (FY) . This is called as trailing EPS. PE ratio seen on internet are calculated using trailing EPS. Theoretically, PE ratio of stocks should be below 15. Stock with PE above 15 can be considered overvalued. But there can be a condition where PE ratio of stock is above 15 but still it is undervalued. In this article we will also see how this is possible.
What it means when stocks are trading at PE ratio of 15,20,25,30…?
Market price of stock is directly related to EPS. Suppose two stocks A & B has same EPS of 5. But PE ratio of A is 15 and that of B is 25. It means, B is more overvalued than A.
This is first hint to investors about stocks valuation. But for trained investors what is more important is why PE ratio of B is 25? For blue chip companies, PE ratio is very high. Investors have more confidence (EPS growth in future) on blue chip companies.
Hence they are ready to pay higher price to buy them. But this does not mean that all high PE stocks are good stocks. Speculative factors also push market price of stocks high. Hence we can say that irrespective of PE ratio being high or low we cannot take investment decision on this information alone. So when we are looking at PE ratio, we must first understand why PE ratio of stock is high or low. If speculative factors are dominating its market price of because of its weak/strong fundamentals the PE ratio is so.
Looking at market price of stocks is not enough
There are investors who buy/sell stock by looking at just market price. Looking at PE ratio to value stocks is at least better than looking at only market price or at earning. Valuing market price of stock comparing it with companies earnings is a good understanding. Once we calculate PE ratio, we can use this metric to compare PE ratio to competing companies (of same sector). The company with lower PE ratio is better priced than others.
Frankly speaking, just by looking at PE ratio of stock, it says nothing. Once we correct PE ratio with the EPS growth rate it gives us more understanding about the companies true valuation. A stock which has PE ratio of 20 and EPS growth rate of 20%, means it is carrying good valuation. Suppose another stock whose PE ratio is 20 and its EPS growth rate is 10, then this stock can be said to be overvalued.
PE Ratio alone is not Enough…
PE ratio is a tool used by stock investors to value stocks. Price Earning Ratio can be calculated very easily by dividing market price of share with its EPS. How this PE ratio is helpful for investors is like this, Market price of stock tells us how much this stock is valued/rated by the market (it is a speculative price).
EPS tells us how much this should be valued in terms of its earning potential. Generally market always over rates its stocks. EPS values helps investors to gauge how much the stock is overvalued. Stock investors would like to avoid overvalued stocks. Too high PE ratio means stock is overvalued. As a rule of thumb, a stock with PE ratio of 15 can be said to be reasonably priced. But PE ratio alone cannot be the deciding factor of stock buy/sell, complete fundamental analysis of stock must be done before buying one.
Low PE Stocks in India with its PEG Ratio
(Updated as on August’2017)
* P.Note: P/E Analysis of companies has been without evaluating companies business fundamentals. It is essential to do fundamental analysis of these companies before buying its stocks.
|SL||Company||Price||P/E||Market Cap (Cr)||PEG (1Y)||PEG (3Y)||PEG (5Y)|
|1||Balrampur Chini Mills Ltd.||175.05||6.82||4,104.67||0.03||0.05||0.05|
|2||Dalmia Bharat Sugar and Industries Ltd.||168.00||7.15||1,359.78||0.07||0.05||0.08|
|3||West Coast Paper Mills Ltd.||184.05||7.28||1,218.60||0.00||0.09||0.36|
|4||Mangalore Refinery & Petrochemicals Ltd.||139.75||7.8||24,624.01||0.07||0.18||0.46|
|5||Dhampur Sugar Mills Ltd.||265.25||6.67||1,776.86||0.02||0.23||0.33|
|6||Indian Metals & Ferro Alloys Ltd.||688.95||4.96||1,886.78||0.02||0.17||0.48|
|7||Tata Communications Ltd.||664.15||15.46||18,908.32||0.00||0.15||0.52|
|8||JSW Steel Ltd.||253.85||19.92||61,675.38||0.01||0.14||0.33|
|9||PTC India Financial Services Ltd.||37.50||6.87||2,453.52||0.10||0.27||0.25|
|10||Maithan Alloys Ltd.||525.00||6.55||1,561.83||0.10||0.10||0.45|
|11||Hindustan Petroleum Corpn. Ltd.||479.50||14.66||73,821.59||0.20||0.15||0.13|
|12||DCM Shriram Inds. Ltd.||322.50||4.77||573.10||0.06||0.26||0.27|
|13||PNB Gilts Ltd.||57.40||5.96||1,030.56||0.04||0.38||0.29|
|14||Polyplex Corporation Ltd.||474.00||7.98||1,497.68||0.02||0.07||0.80|
|15||Chemfab Alkalis Ltd.||262.60||11.47||239.75||0.00||0.12||0.17|
|16||Alfred Herbert (India) Ltd.||725.00||3.26||55.93||0.01||0.11||0.17|
|17||Sunteck Realty Ltd.||255.90||18.08||3,232.79||0.11||0.06||0.12|
|18||Electrosteel Castings Ltd.||28.15||15.22||1,026.25||0.02||0.12||0.30|
|19||Seshasayee Paper & Boards Ltd.||702.65||7.03||889.26||0.06||0.22||0.54|
|20||Fortis Healthcare (India) Ltd||148.60||18.96||7,788.13||0.01||0.27||0.42|
|22||Artson Engineering Ltd.||57.50||7.55||209.89||0.01||0.20||0.46|
|23||Suchitra Finance & Trading Company Ltd.||24.65||4.49||22.98||0.01||0.07||0.09|
|24||JK Paper Ltd.||103.10||8.9||1,746.14||0.08||0.25||0.59|
|26||Rajshree Sugars & Chemicals Ltd.||57.10||3.99||161.96||0.06||0.38||0.08|
|27||Chennai Petroleum Corpn. Ltd.||457.85||11.66||6,920.66||0.38||0.20||0.20|
|28||Naga Dhunseri Group Ltd.||768.00||0.82||70.76||0.04||0.10||0.48|
|29||Borosil Glass Works Ltd.||9,299.95||17.59||2,148.30||0.02||0.23||0.38|
|30||Vikas EcoTech Ltd.||21.70||15.63||610.18||0.03||0.14||0.34|
|31||DCM Shriram Ltd.||409.35||10.84||6,701.29||0.18||0.47||0.13|
|32||Vardhman Holdings Ltd.||3,690.00||6.6||1,171.29||0.25||0.24||0.32|
|33||Srikalahasthi Pipes Ltd.||354.95||10.59||1,415.98||0.16||0.10||0.49|
|34||EID-Parry (India) Ltd.||327.90||11.76||5,837.67||0.01||0.17||1.42|
|35||Kushal Tradelink Ltd.||121.35||20.54||2,879.23||0.04||0.28||0.21|
|36||Thirumalai Chemicals Ltd.||1,423.00||17.09||1,424.99||0.12||0.18||0.11|
|37||NLC India Ltd.||101.00||4.35||15,308.61||0.00||0.69||1.08|
|38||IG Petrochemicals Ltd.||518.95||14.26||1,576.70||0.22||0.07||0.30|
|39||Indian Oil Corpn. Ltd.||436.45||13.92||214,145.41||0.23||0.35||0.40|
|40||Modi Udyog Ltd.||44.50||15.47||130.49||0.05||0.03||0.18|
|41||Allsec Technologies Ltd.||396.00||9.56||606.79||0.15||0.23||0.36|
|42||Swastika Investsmart Ltd.||100.25||6.6||31.06||0.01||0.16||0.31|
|43||Inox Wind Ltd.||127.15||11.38||2,873.84||0.33||0.34||0.12|
|44||Jubilant Life Sciences Ltd.||701.70||19.9||11,181.54||0.32||0.20||0.14|
|45||Dewan Housing Finance Corpn. Ltd.||524.80||5.47||16,177.65||0.06||15||0.33|
|46||Brahmanand Himghar Ltd||4.08||1.21||5.71||0.01||0.08||0.12|
|47||Kuantum Papers Ltd.||490.05||6.56||424.14||0.08||0.62||0.20|
|49||Tanla Solutions Ltd.||32.50||7.39||360.55||0.03||0.26||0.85|
|50||JHS Svendgaard Laboratories Ltd.||69.70||9.69||394.17||0.08||0.44||0.29|
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