What is P/E valuation?

rijayasooriya · 1 What is P/E valuation? Fri Jun 03, 2011 12:55 pm

rijayasooriya

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What is P/E valuation? How can we interpret it? Please Help...

Slstock · 2 Re: What is P/E valuation? Fri Jun 03, 2011 1:24 pm

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rijayasooriya wrote:What is P/E valuation? How can we interpret it? Please Help...

Below is a post I made which maybe be useful to you.

PE is one measure to evaluate whether a share is undervalued especially when compared to sector. But be mindful there are other measure like NAV( net assert value) , PBV( price per book value) to evaluate the value of a share. For example for LAnd and Property you will be many of the NAV value of companies are higher than the tradign rpice right now. But their PE is still very high as their earnings have not justified their current price or the potential with a future sector boom.

Here is an exampel I posted for some else regadrign PE

Short Example :

ABC company 1 Year EPS is Rs 10
Now Trading at Rs 100 per Share.

PE= 100/10=10

Depending on the sector we can identify this as an undervalued share. For example if in Bank/Finance Sector, the sector PE might be 20. If this is 10, then it is undervalued. Fair Value can be PE 15 x Eps 10= Rs 150

As another example , if ABC is in Plantation sector we need to be cafeful as Plantation sector PE should be lower due to risk and volatility. So in Plantation I value say this is fair valeu already.

There many other factors which adds to a share value. It celebrity status, demand and supply, market leader, number of share in the market, pbv , nav etc are a few other facotrs.

Hope this simple explanation is useful.

Also you can check the help section of the site

cOrE · 3 Re: What is P/E valuation? Fri Jun 03, 2011 5:32 pm

cOrE

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"Fair Value can be PE 15 x EPS 10= Rs 150"

Please explain me how did you get the PE of your calculation as 15 when you are calculating the fair value.

Slstock · 4 Re: What is P/E valuation? Fri Jun 03, 2011 5:46 pm

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cOrE wrote:"Fair Value can be PE 15 x EPS 10= Rs 150"

Please explain me how did you get the PE of your calculation as 15 when you are calculating the fair value.

It is an Example as stated. This is only to explain what PE is. I am not suggesting to use PE of 15 blindly.
It depends on its sector and the actual company.

In reality for example in Plantations
KGAL is trading at PE= 200/33.66=5.95

So if one take a PE 0f 8 kgal is valued at Rs 268.8
If you take PE of 10 then Rs 336.

So to arrive at a fair value we need to pick a PE as you see. But this picked PE can differ as there is no rule. Thats why I said you need to look at the sector PE to come up with educated guess of a fair value PE. Also you can look at other thigns mentioned but wanted to keep it simple as this is only a simple explanation to the OP question

cOrE · 5 Re: What is P/E valuation? Fri Jun 03, 2011 6:31 pm

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thx slstocks..

cOrE · 6 Re: What is P/E valuation? Fri Jun 03, 2011 9:28 pm

cOrE

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Correct me if I am wrong...

rather than predicting vales to get the fair value, isn't it better to multiply sector PE by Annual EPS of that company?

Slstock · 7 Re: What is P/E valuation? Sat Jun 04, 2011 3:30 am

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cOrE wrote:Correct me if I am wrong...

rather than predicting vales to get the fair value, isn't it better to multiply sector PE by Annual EPS of that company?

Well if you take the sector PE the problem is below..

Well if you take the sector PE as a standard it can create a problem. It depends on the industry and future growth...

1) For plantation sector, the PE according to below is 16
http://www.cse.lk/sectors/sectorSummary.htm

So if you value KGAL for example with PE of 16 then the value is Rs537.6. We do know that there are other plantations which is also trading at much lesser PE than 16. As you see it will not be safest to keep high targets( expectations) to do valuations going with Sector PE ( in this case).

2) Let me point you towards another angle,

What about Contruction and Engineering sector.
If you look it sector PE according to cse it is 12.6

First question is does it have to be 12.6 comparatively. It it too low. It is reasonable?

That why I initially said " you need to look at the sector PE to come up with educated guess of a fair value PE."