PE Ratio, Debt to Equity Ratio
PE ratio || Debt to equity ratio || Fundamental analysis || Investment || Price to Earning Ratio || PE Ratio || Share on Earnings || Debit to Equity Ratio
Here are few important things you need to know for basic fundamental analysis in this section. If you are thinking of investing in the stock market, then you need to know some basic things.
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1) What is PE ratio?
2) What is debit to equity ratio?
1) Price to Earning Ratio : Price to earning ratio : PE ratio :-
PE ratio is an important factor in fundamental analysis. The first is how much the share price is compared to the earnings per share.
The lower the PE ratio, the more suitable the stock is for investment.
If the company’s PE ratio is lower than the sector P/E ratio (the average PE ratio of other companies making similar products ), the stock is considered suitable for investment.
PE ratio is obtained as follows,
PE ratio = Market price of share / Earnings per share
Before that let’s see what is the earnings per share,
Share on Earning: Earning per share (EPS): –
How much profit a company earns per share is called Earning per share .
Earning per share = Net profit of the company / total number of shares of the company
For example :- ITC Ltd. The net profit of 2021 is Rs.130316800000 and the total number of shares is 12308844231.
Share on mug earning = 130316800000 / 12308844231
=१०.५८७२४९१
= Rs.10.59.
That means ITC’s 2021 earnings per share is Rs 10.59.
In 2021, the market price of ITC shares was between 200 and 256. The price of shares changes daily. Similarly, the ratio of earnings per share and price to earnings also changes.
Now let’s see the PE ratio of ITC at price 256 per share.
PE ratio = ۷۵۱ / 10.59
PE ratio = ۷۵.۱۵
That means PE ratio of ITC Ltd at price of 256 is 24.18.
The market price of the share increased as compared to the net profit of the company. So PE ratio increases. P/ PE ratio
The lower it is, the better the stock is for investment. In general, a stock with a PE ratio of around 20 is considered a good investment.
A PE ratio above 30 is considered a high PE ratio and such shares are not considered for investment.
But not all investors think so. Some investors buy shares for a short period of time and sell the shares when the price rises slightly, thereby increasing the price of the shares. But the company’s earnings do not increase compared to that, as a result the difference between price and earnings per share increases and the PE ratio increases.
Some companies with high PE ratio :- MRF Ltd, Ceat Ltd, Maruti Suzuki India Ltd.
Although stocks with low PE ratio are good for investment , there are other things to consider. Such as the company’s debt, company’s financial progress, company’s profit margin, company’s upcoming projects and goals.
2) Debit to equity ratio:
debt to equity ratio: –
Debt to equity ratio is also an important factor in fundamental analysis. It compares how much debt a company has against its equity. The lower the debit to equity ratio, the more suitable the stock is for investment.
The debit to equity ratio is obtained as,
Debit to equity ratio = non-current liabilities / shareholders’ equity
Mahindra & Mahindra Ltd. The non-current liability (debit) of 2022 is around 6735 . 56 crores. In this and Total Shareholders Equity 38960 . 95 crores.
then,
Debit to Equity Ratio= 6735 . 56 / 38960 . 95
=०.१७२८७९
=०. १७
Means Mahindra & Mahindra’s 2022 Debit to Equity Ratio is 0 . 17 is
Debit to equity ratio is 0 to 1 . If it is between 5 such shares are considered suitable for investment.
Some Companies with High Debt to Equity Ratio:-
1) Vodafone Idea Ltd. :– Vodafone Idea’s 2020 Debt to Equity Ratio was 10.71. That means the company has 10 times the debt of shareholders’ equity in the year 2020. Vodafone Idea’s Debt to Equity Ratio in 2021 is -4.18 and in 2022 -3. 1 was
2) Suzlon Energy Ltd. :– Debit to equity ratio of Suzlon in 2020, 2021, 2022 respectively -0. 86, was -1.11, -1.09.
In both the above examples, the Debt to Equity Ratio in 2021 and 2022 is in the negative even though it looks low. As the total debt of the company exceeds the assets, the equity has gone into the negative. Such shares are risky in terms of investment.
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