All about P/E ratio

When you are evaluating a company for its value from an investment perspective one ratio that everyone looks for and talks about is P/E. You will see everyone referring to it and talking about it in the equity markets. Here are some answers to common questions -

What is the P/E ratio?: P/E stands for Price to Earnings ratio. It is the price of an equity share of the company divided by the earnings of the company against each equity share. Let us look at each of these parameters in detail.

• Price of an equity share (P): This is the prevaling price of the equity share of the company in the market today. Pls note this is different from the face value of the share of the company. A share of face value 10 may be priced at a premium to (above) the face value or at a discount to (below) the face value.
• Earnings per share (E): It is calculated as the profit earned for the most recent 12 month period per each outstanding share. For example if a company makes a profit of 100,000 and has 1000 shares outstanding, the earnings per share are 100.

What does P/E denote?: From a financial perspective one would like to pay a price for an investment equivalent to the profit (earnings) that can be derived from the investment. So ideally one would like to have a P/E of 1. Since the earnings of a good company are bound to grow (increase), one might want to pay a price greater than the current earnings of the company. So the P/E becomes > 1. If the company is not making any profit, or making a loss for that matter P/E becomes < 1. So essentially P/E denotes what the market thinks of the company's growth prospects. If it is a high growth company one would like to pay a steeper price than the current earnings and if the company is low or medium growth then obviously the price will be lower. Also if the company is growing its earnings quickly the P/E will become low. Obviously then a lower P/E denotes a value investment (value investments will be covered in a later blog).

What is the right P/E?: There is no one number that can be specified as the appropriate P/E for a company. Various factors like business environment, economic growth rate, regulations, demand, projected growth rate, etc. contribute to the determination of what one feels as the correct P/E for an investment. Since its a ratio of Price to Earnings, lower the value, the cheaper the company is to own.

Word of Caution: Know that the P/E can be manipulated! Since the concentration is on lowering the P/E ratio, it can be manipulated by increasing the denominator. Lets say company X has 1000 shares outstanding at a price of 800 per share and earnings of 100,000. Current P/E of company X is 800/100=8. Now company X decides to buy back 200 of its shares at 800. The new P/E of X is 800/125=6.4! So even though the company did not actually grow its earnings, it managed to lower its P/E just by buying back its shares!

Tips for taking baby for immunization

I was in Bangalore this weekend to spend time with Geeta and Ahan. I had never been with them for his immunization visits and we planned this to coincide with my travel there. Baba often said that the pain of a parent when their child is hurt cannot be explained but only experienced. Over the weekend I realized what he meant.

Geeta and I knew fully well that he would be fine in a couple of days but both of us had our stomachs in knots seeing him in pain. The little fella on his part was very brave. It didn't take him long to realize that the pain intensifies if he moves the leg where he was given the injection and he quickly adjusted making sure the leg is kept as immobile as possible.

Regular Medomol drops ensured fever didn't stay on for too long and we kept him distracted from the pain. He loves going out and we kept him distracted by taking him out. When we got back home, we put him to bed at the earliest and he too seemed to cooperate. He woke up energized but the leg was still hurting. Through the day the fever and pain subsided and he seemed to be getting back to his natural rhythm and antics!

My advise to all parents taking their child for immunization dose -

• Don't panic, the child will be uncomfortable for some time but there is nothing that your love cannot cure. Cuddle and comfort them.
• Keep them dressed comfortably. The area where the syringe was used will hurt and so make sure there is no further irritation due to tight clothes.
• Keep them cool, don't overdress them. Especially with fever, it is better to keep them open.
• Keep Medomol or your paediatric prescribed fever medicine at hand.
• Keep track of what distracts them, when they cry due to the pain, this is what will come to your rescue.
• Take turns in taking care, else both of you will be exhausted at the same time.

New movie Release

Latest Blockbuster "SAARE ZAMEEN PAR" ..

Premiered this week & Running Successfully all week at BSE and NSE..

Directed and Produced by Ambani Bros,

POWER ON.. MARKET GONE

Carnage on Dalal Street - Day 2

If yesterday was a shock, today was spectacular. Within 5 mins of the market opening the BSE sensex had hit the lower circuit of 10% and trading was halted! A drop of about 2000 points in 5 mins. An event which prompted the PM and FM, to intervene and issue statements that the fundamentals had not changed and that India would continue to grow at 8-9% clip. When trading resumed after an hour the markets still traded volatile, recovering then sinking and finally recovering to an 800 point loss to close the day. Weak cues from the global markets and the margin trading issues contributed to the carnage.

This is a good time to enter the markets. One of the main principles of value investing is buying low and this situation provides the right environment to choose the stocks and invest in them for the long term. Ofcourse, a lot of research and analysis needs to be done before investing, but if you believe in the Indian growth story and dont have that much time, the best idea would be to invest in Index funds. The advantage being their low expense structure since no one has to manage them and inbuilt diversification.

BSE Sensex Melts!

Boy, what a day! We lost over $169 billion or Rs6.69 lakh cr in market cap today. Everything was going in just one direction, DOWN. The BSE sensex fell 7.41% to 17,605. A fall of more than 1,400 points in one session! About 38 companies lost more than 20%. The fears of an US recession along with the expensive P/E of the Indian market triggered this free fall. Now the big question on everybody's mind is whether this is the bottom or they is more pain to come. There is no use timing the market. No one can. The best option is to buy on fundamentals and stay invested for a longer time period.

With the markets at current levels, for someone with enough liquidity its a good time to enter the market. Obviously no one knows what will happen from here, but if you invest on fundamentals and value, you should stand to gain in the long term. Happy investing.

Bobby Fischer is no more

One of the chess world's greatest geniuses, Robert James "Bobby" Fischer, has died at the age of 64 in Reykjavik, Iceland on 17th January. Bobby Fischer became famous as a teenager when he playing for America became the first and thus far the only american to win the official World Chess Championhip in 1972 by beating Russia's defending champion Borris Spassky. This was during the cold war and many publicized this as a America vs Russia battle.

The Chess world will definitely miss one of its greatest master. May he rest in peace.

What is Web 2.0

We hear the term Web 2.0 being thrown around so much these days. What is this Web 2.0? Is it a technology; is it an architecture or features? Well, I think we should visualize Web 2.0 as a set of principles and practices. It is basically a collection of principles that successful business of the current world have applied. Some of the practices and principles of Web 2.0 are -

Treating the web as a platform:
Web services, deliver the software as a service, not as a product
no releases, just continuous improvement
no licensing or sale, just usage
leveraging customer self service
reaching out to all the corners of the web not just the big few
service automatically gets better the more people use it
Harnessing Collective Intelligence:
use of tags - collaborative categorization (folksonomy)
effects of user contributions (users add value and get other users)
Infoware not software:
own certain classes of core data
continuous maintenance of data
treat users as co-developers
Lightweight programming models:
loosely coupled systems
think syndication, not coordination
design for hackability and remixability
Design software for multiple devices:
software written above the level of a single device
Rich user experiences:
rich user experience delivered over the web