When it comes to selecting stocks, probably people love to look at a list of top low PE stocks.

The use of stock valuation tool, the Price to 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 stock 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? One must use it in combination with other financial ratios?

Surely, isolated use of PE ratio is not advisable. But no way one can diminish the utility of PE ratio. Even today, a lot of people start their screening process from low PE stocks.

As a starting point, preparing a list of low PE stocks is advisable. Once this list is ready, a detailed fundamental analysis of individual stock is a must before investing.

In this post we will see a method to use PE ratio more effectively.

Earning Per Share (EPS) is PAT per share of last financial year (trailing EPS).

PE ratio seen on internet are calculated using trailing EPS. Market price divided by EPS gives us the PE ratio of a stock.

Theoretically, PE ratio of stocks should be below 15. Stock with PE above 15 can be considered overvalued.

This is a universal rule? No.

It is essential to look beyond the PE15 rule.

There can be a condition where PE ratio of a stock is above 15, but still it is undervalued.

You are surprised? Yes I can understand. When I first read about this, I was both surprised and confused.

I was surprised as I didn’t expected someone to tell me this fact. I was confused as this one statement made me doubt everything that I have learnt about stock valuation.

In this article we will dig slightly deeper into the concept of low PE stocks.

## What it means when stocks are trading at PE ratio of 15,20,25,30…?

Market price of stock is directly related to its 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.

PE is the first hint to investors about the stock’s valuation.

But for trained investors, what is more important is why PE ratio of of any stock is high or low?

For blue chip companies, PE ratio generally trade at very high levels. Why?

Because, future EPS growth rate of blue chip companies are more predictable. Hence investors are ready to pay higher price to buy their stocks.

But does this mean that all high PE stocks have predictable future growth? No.

Speculative factors also push market price of stocks high. Hence, we can say that irrespective of PE ratio being high or low, one must not take the investment decision based on PE ratio alone.

Important is to looke deeper into the PE ratio.

When we are looking at PE ratio, we must also understand why PE ratio of this stock is high or low.

**Q1**: If stocks PE ratio is **high** due to its high growth potential, or due to speculative forces?

**Q2**: If stocks PE ratio is **low** due to its diminishing growth potential, or due to speculative forces?

Answering these questions before committing to a stock is essential for investors.

When speculative forces dominate, stock price touch unreasonable levels. It is investors responsibility to evaluate, if speculative forces are dominant on a stock pricing.

Here will talk more about low PE stocks. Idea is to learn to evaluate if low PE stocks are good buy or not.

Low PE stock, with weak fundamentals is not interesting.

Low PE stock which also has strong fundamentals can be a great contender for investing.

## Why we need PE ratio?

Looking at market price of stocks is not enough

There are people who buy/sell stock by looking only at its market price. This is like investing blindly.

Looking at PE ratio, to value a stock, is at least better than looking only at its market price.

What a PE ratio does is this, it checks how high is the market price of a stock compared to its EPS.

Suppose there are two stocks A and B. Both has a market price of Rs.100. Stock A has EPS of 10, and B has EPS of 15.

Hence PE ratio of the two stocks is as follows:

- PE (A) = 10.00 (100/10)
- PE (B) = 6.66 (100/15)

After we look at the PE ratios of A and B, it is giving a clear hint that B is better valued than A.

What is important here is to note that, how **comparing** PE of A and B gave us an idea of which stock is better valued.

We need PE ratio to compare price of two stocks and arrive at a conclusion.

The company with lower PE ratio is better priced than the others.

### PE Ratio alone is not Enough…

Frankly speaking, just by looking at PE ratio of stock, says too less about the stock valuation.

So what is the alternative? Do a more detailed analysis.

Factoring in a another stock metric can greatly enhance the utility of PE ratio.

Embedding in the PE ratio, the EPS growth rate, will give more understanding about the stocks true valuation.

Lets take an example:

There are two Stocks ABC and XYZ. Metric of these two stocks are as below:

- Market Price (ABC) : Rs.100
- EPS (ABC) : Rs.5
**PE (ABC) : 20**- Market Price (XYZ) : Rs.50
- EPS (XYZ) : Rs.2.5
**PE (XYZ) : 20**

Which stock is better valued?

As PE ratio of both ABC and XYZ is identical (at 20), it is like impossible to judge which is better priced.

So what to do now?

We can analyze ABC and XYZ based on their growth potential.

One of the important parameter that tells us best about the future growth prospects of a stock, is its historic EPS growth rate.

Peter Lynch says, a fast growing stock can afford a higher PE ratio and still remain undervalued.

Suppose the EPS growth rate of ABC is 18% per annum, and that of XYZ is 22% per annum.

Dividing PE with EPS growth rate will give a value which is termed as PEG ratio.

Lets calculate the PEG ratio of ABC and XYZ.

- PE (ABC) : 20
- EPSG (ABC) : 18
**PEG (ABC) : 1.11 (20/18)**- PE (XYZ) : 20
- EPSG (XYZ) : 22
**PEG (XYZ) : 0.91 (20/22)**

Which stock is better priced?

As a rule of thumb, a stock which has a PEG of below one (1) is said to be undervalued. Comparatively, lower PEG means better valued.

In our example, as PEG of XYZ is lower (0.91) than PEG of ABC (1.11), hence B is better valued than A.

## Final Words…

Use PE ratio as a tool to value good stocks.

Calculate Price Earning Ratio (PE) easily by dividing market price of a share with its EPS.

How this PE ratio is helpful for investors?

Market price of a stock will tell *only* about how much a stock is valued by the market. It is just a speculative indicator of valuation.

EPS tells us how much profit the company has generated per share.

A combination of market price of a stock and its EPS gives us PE ratio.

Generally market always overrates good stocks. Use PE ratio to gauge stock’s true value.

There is so much fuss being created about undervalued and overvalued stocks, why?

Undervalued stocks makes money for its investors. While investing in overvalued stocks leads to losses.

It is essential for stock investors to avoid overvalued stocks.

Use of low PE ratio along with PEG ratio, is a great way to identify undervalued stocks.

A stock which is trading at low PE ratio (of say below 15) and also has a PEG below 1, makes it very interesting for value investors.

## Low PE Stocks in India with its PEG Ratio 2018

**(Updated as on April’2018)**

- Balrampur Chini Mills Ltd.
- Mangalore Refinery & Petrochem.
- NLC India Ltd.
- Chennai Petroleum Corpn. Ltd.
- GHCL Ltd.
- Hindustan Petroleum Corpn. Ltd.
- Indian Oil Corpn. Ltd.
- DCM Shriram Ltd.
- Rural Electrification Corpn. Ltd.
- Suzlon Energy Ltd.

Click this link to see a list of 50 number Low PE ratio stocks with their PEG Ratio (1 year, 3 year and, 5 year) in a tabulated form…

*** P.Note**: P/E Analysis of companies has been done without evaluating companies business fundamentals.

**Disclaimer**: All blog posts of getmoneyrich.com are for information only. No blog posts should be considered as an investment advice or as a recommendation. The user must self-analyse all securities before investing in one.

Hi!,

As metioned in this articale the formula for PEG ratio is [(EPS2/EPS1)^(1/n) – 1].

Now some times for some companies I found situation where EPS2 > 0. i.e. EPS for FY 17 > EPS for FY13. So it means EPS has grown for the comapany. But after running further calcultion. The value of (EPS2/EPS1)^(1/n) < 1. So though EPS has grown over the five years. the net value of [(EPS2/EPS1)^(1/n) – 1] comes negative.

E.g. if EPS for FY17 is 4 and EPS for FY13 is 2.74, So (EPS2/EPS1)^(1/n) = 0.85. Hence total value for [(EPS2/EPS1)^(1/n) – 1] is coming under 0. So does this matametics shows that EPSG is less than 0 means company has negative growth? (Though the EPS has grown over the 5 years.)

And Why we always subtract '1' in this formula irresoective of 'n'?

Thanks,

Pushkar

If:

EPS2 = 4, EPS1 = 2.74, what will be (EPS2/EPS1)^(1/n)?

when n=1, (EPS2/EPS1)^(1/n) = 1.45

when n=2, (EPS2/EPS1)^(1/n) = 1.20

when n=3, (EPS2/EPS1)^(1/n) = 1.13

when n=4, (EPS2/EPS1)^(1/n) = 1.10

Understood! Thanks!

Regarding the formula for EPS groth rate I have one question. If company gives bonus shares, the EPS gets rerated to lower level. So EPS2 = EPS of FY17 – EPS of 13 will come nigative. So how to calculate EPSG and PEG in such scenarios. Because in such cases companies EPS get re rated to lower levels but comapny has given bonus does not meant that its growth has slow down ()

There should be no consideration of issuance of Bonus Shares in calculation EPS growth rate.

If EPS goes down, EPS growth rate must suffer. Its simple mathematics.

But a more important question is, are bonus share issue good for investors?

For new investors (who are yet to buy shares of a company), bonus shares decreases the EPS and hence not preferable.

For those investors, who already own shares in that company, the condition is slightly better….

Why investors buy stocks of any company? To earn dividends and/or get price appreciation over time.

When companies are short of cash, they cannot pay dividends (cash) to shareholders.

But to keep the investors glued to their stocks, they give bonus shares.

But issuance of bonus shares comes at a cost…

It lowers the companies Reserves.Opps…

On one side EPS is falling due to bonus shares. It also happens with share splits. So not much of a problem.

On other side, the accumulated reserves also falls. This is not acceptable.

Such a stocks can sustain its price levels?

No. Hence the market price falls after bonus shares are issued.

So for existing investors, there is a temporary relief in form of bonus shares receipt.

But over a long term horizon (as both EPS and Reserves has fallen), gain is little.

Thanks for the quick reply!

I understod your point and I am agree to that. Now my very basic question is though EPS decreases due to bonus share, it will not affect the growth (revenue and net profit) of the company so then what is the problem to buy that share as new investor?

As I am learing all these thing first time, so that is why I am having more queries. Sorry for bothering you.

-Pushkar

For an investors, EPS is more meaningful than Net Profit.

If a company is able to increase its revenue, but not its, it is almost meaningless for the investors.

Why you have been putting vakrangee so often in your posts even though it’s on continuous lower circuits? There are several other issues related to this stock as well.

Hi,

Really nice article and very helpfull for the beginer like me. But I wanted to learn how to identify that having low PEG like 0.4 or someting is good to invest because having lower PEG or there could be some problem with company that is why its lower. So which other parameters do I need to consider to eveluate?

Thanks,

Pushkar

P/E, P/B, PEG etc are nice ratios.

But there can be nothing better than P/IV=0.67.

[IV = Intrinsic value]

Thanks a lot! I will look into it.

Brilliant Education, clean explanation s of concept

a) In your article the key factor is EPS growth rate which you have failed to explain. How did you arrived at EPS growth rate of ABC and XYZ. If it is arbitrary or based on data ? Pl exaplain.

b) In the table below showing PEG ratio, there is no column of PEG. The other cols are unexplained (P/S and P/B). Div yield is not related. Further the table should be sorted on PE ratio or PEG. Seems to be copy paste work ? Any answer.

Calculation of EPS growth rate can be done using this formula:

[(EPS2/EPS1)^(1/n) – 1], n=number of years between EPS2 and EPS1.

Thanks for pointing the mistake. The table being displayed was wrong. I have made the correction.

Sorry for the confusion.

Hey. Great research and advice. I tried to find out low P/E, Low PEG and then I looked into the financials of the company. Hit the bulls eye.

Waiting eagerly for your updated list of stocks for Month of September/October. Please update or at least send me a few names of the stockes if you don’t have time for a long list.

The site is very interesting, insightful, and informative. Please keep sharing

Great help. Thanks a lot, God bless!!

you website is excellent. I really could not find low P/E with low PEG information on any other websites. Congratulations to you. However, the above information should be updated quaterly so that the investors can taking decision based on current data. Thank you

Thanks for your feedback.

Data has been updated.

Thanks a lot. You have put your valuable time for this analysis. God bless you

very informative article. God bless you in sharing this kind of valuable info to

public. A salute to the generous mind.

Excellent articles at one place. Thanks a lot.

Can you explain with example how PEG is calculated ? What is full form of PEG ? We shall appreciate if all abbreviations contain full form in bracket first time in articles.

can you guide me whether to purchase IVC @ 17.80 today

Hi

Can we buy Chennai petroleum stock at current market price. It has 3.7x P/E ratio and 51 EPS.

Hi, Whats the criteria behind finding only the above companies. Do these companies have other things like capital or ROE etc.?

Sir, Please tell me how do you calculate the CAGR or 5-year average EBITDA growth rate.. Which site? I cant find it anywhere..

You will not find it anywhere 🙂

Its a mathematical formula.

Google it, you will know…

Year 2007 2008 2009 2010 2011 2012 2013 2014

Revenues $13.38 $8.64 $14.64 $17.73 $29.40 $34.50 $43.32 $66.16

FV $9 $15 $18 $29 $35 $43 $66

PV $13 $13 $13 $13 $13 $13 $13

n 1 2 3 4 5 6 7

CAGR -35.43% 4.60% 9.84% 21.75% 20.86% 21.63% 25.65%

-51.42% 6.68% 14.28% 31.57% 30.27% 31.39% 37.23%

Manish ji, I have tried to use the formula in excel sheet as above.. Can you explain PEG ratio in detail. I will appreciate it..

I dont think if i can get the PEG on any other site.. You are awesome!