Concept of P/E

Every time we see a news reader suggesting a stock to sell or buy they say the P/E for this stock is very high or lower than the industry averages or when we read an article we come across the word "P/E". What is P/E? Why is it important? What can we know from it? Let me start explaining in you in simple terms.

A P/E is nothing but an ratio. It stands for "Price to Earning" ratio. Now we know the expansion of the word P/E. We also get a hint from it that it has do something with the Price (Share Price) and the Earnings (Net Profit / Income) of the company. Now that we got a hint what it is lets define what's "Price to Earning" ratio.

The P/E ratio (price-to-earnings ratio) of a stock (also called its "P/E", "PER", "earnings multiple", or simply "multiple") is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. So, it shows the relations of how much you are paying for that one share of a company with regards to the earnings of the company.


P/E = Price per share / Annual Earnings per share


The P/E Ratio is expressed in number of years.

In this ratio we have the denominator as Annual Earning per share or simply it is referred to as EPS (Earnings Per Share). Aha! We have heard this word also many times. But, What is EPS?

Earnings per share is the net income of the company for the most recent 12 month period, divided by number of shares outstanding. In simple terms it is nothing but the Net income / Earnings of the company for the financial Year divided by the outstanding number of shares. What's this term "Outstanding number of shares" you must be wondering. "Outstanding shares" are nothing but the shares that are issued by the company. These include shares that can be traded i.e that can be bought and sold freely through the stock exchange (also includes restricted shares or share that need special permission before being transacted).

So, now lets say that the Price of the share of A Ltd is Rs. 2000 and it has an EPS of 20, then the P/E is 100 (2000/20).

What does a P/E of 20 tell you?
It tells you that

* The share price of A Ltd is 20 times its earnings
* It will take 20 years to recover the price you paid to buy the share of A ltd (i.e. "number of years of earnings to pay back purchase price") without taking into account the time value for money
* You are paying Rs.20 for every rupee of earnings of A Ltd


Again we should be comparing with the industry averages to see if A Ltd's P/E is in significant discount or premium. Say A Ltd is a pharmaceutical company. Then, we should see the pharmaceutical industry's average P/E and see how A Ltd's P/E stands against it.

The P/E we talked here was with respect to Trailing P/E i.e. Earnings for the last 12 months is taken into consideration, historical data. P/E can also calculated using estimates of earnings of the next 12 months in future. This is called as Forward P/E.

Now, the nest question is will the P/E tell me whether the stock is cheap or expensive. P/E just gives an idea but whether a particular P/E is high or low depends on many things and there is no perfect answer to that. A P/E depends on the growth rates of the company, industry it is in, expectations form the companies etc as all these factors get reflected in the share price.

So, use P/E just as a viewpoint with other parameters when you buy a share but not as a guide.

The other interesting part which i came across is when you take a 10-year period and calculate the P/E you might find that the company's P/E has a range and thus you may put a band on when to enter and when to exit using the P/E.

We have just touched on what's a P/E and tried to understand a little. Hope you enjoyed reading it and got some idea about it.

Silla Nodigal

Silla nodigalil vazhkaiyin arthangal maari vidugiradhu..

andha oru nodi -
Oru pudhu uyirin mudhal moochu,
Oru uyirin kadaisi moochu,
Pala kashtangalukku piragu kidaitha vetri alladhu tholvi,
Oru pirivu alladhu serkkai,
oru kattalai..

Vazhkaiyil indha pala sambhavangal nadandha andha Oru Nodi, Naam manidan, Daivam allai endru puriya vaikindradhu..

Equity Portfolio of Rakesh-Jhunjhunwala for 2010 (as on 31st December 2009)

Dear Readers,

This is the holdings of Mr. Rakesh Jhunjhunwala. He is tagged by the media as 'India's Warren Buffett'.

In 2007, Forbes rated him as India's 51st and the world's #1062 richest man with wealth of $1.1 billion. He is one of the most famous and respected equity investors in India and manages his own portfolio as a partner in his asset management firm, Rare Enterprises.

Jhunjhunwala's portfolio of stocks is tracked religiously. His latest stock portfolio is the subject of many debates and analysis. Like Warren Buffett, Jhunjhunwala is a long term investor, however he acknowledges that it was 'trading' income which helped him built his initial capital base and continues to remain an active trader as he believes it keeps one alert and always on your feet.

And, I have brought you the holdings of Mr. Jhunjhunwalaas on 31/12/2009. All data mentioned here are taken from NSE shareholding pattern, under Public shareholding greater than 1%. M. Jhunjhunwala might have more investments in many companies apart from these which might be less than 1% and thus not captured here.

It would be great to receive your comments.

We see that there were some changes in the holding

1) He has increased his holdings in Geometric Software,Titan, Rallis, Lupin and NCC. This might be taken as indications that he has got much belief in the business growth of these companies.And, we have seen how Titan and Lupin have rallied up recently.

2) He has completely reduced his holdings in Aptech and Dwarikesh Sugars.

3) He has significantly reduced his holdings in Infomedia, Punj Llyod and Karur Vysya bank. He has also reduced his holdings in Praj industries and Hindustan Oil Exploration. We have also seen that the results in these companies dissapointed and share prices of Praj industries are down by almost 20% since highs of December-January months. Having said that Praj forms a significant part of his portfolio (14%). Thus, we can assume the growth story is still intact. His holdings has significant exposure in Geojit ( 18%) and NCC (15%).

4) The results of Viceroy Hotels, JB Chemicals, Vadilal Industries and Alphageo arent published as on date of writing. Any updates on the same will be mentioned in future.

5) His top 5 holdings account for 61.74% and his top 10 holdings account for almost 80.36% of his portfolio.

These shares are held by Rakesh and his wife Rekha Jhunjhunwala and form a part of his disclosed portfolio. He could be holding more shares through companies, trusts, proprietary accounts which are not in the public domain. The details have been procured from NSE India.com

Please read the DISCLAIMER at the bottom of the blog.

Company Holding - 30.09.09 units Holding - 31.12.09 units % of portfolio Increase/decrease

Geojit 18000000 18000000 18.46% 0.00%

Nagarjuna Const. 14900000 15150000 15.53% 1.68%

Praj Industries 15726624 14476624 14.84% -7.95%

HOEL 7822916 7272416 7.46% -7.04%

Geometric Software 4515000 5315000 5.45% 17.72%

Viceroy Hotels* 4750000 4750000 4.87% 0.00%

Titan industries 3538734 3860861 3.96% 9.10%

Punj lloyd 5040000 3790000 3.89% -24.80%

Lupin 3173335 3252835 3.34% 2.51%

Kajaria Ceramics 2502642 2502642 2.57% 0.00%

MidDay Multimedia 2250000 2250000 2.31% 0.00%

Karur Vysya Bank 2568724 2041224 2.09% -20.54%

Agrotech Foods 2003259 2003259 2.05% 0.00%

Bilcare 2002925 2002925 2.05% 0.00%

Provogue 1900000 1900000 1.95% 0.00%

VIP Industries 1263000 1263000 1.30% 0.00%

JB Chemicals * 1251650 1251650 1.28% 0.00%

Autoline Industries 1251233 1251233 1.28% 0.00%

Zen technologies 900000 900000 0.92% 0.00%

Prime Focus 882500 882500 0.90% 0.00%

Rallis India 760888 803088 0.82% 5.55%

Infomedia 1506062 700177 0.72% -53.51%

ION Exchange 650000 650000 0.67% 0.00%

Crisil 550000 550000 0.56% 0.00%

Rishi Lazer 380000 380000 0.39% 0.00%

Vadilal Industries * 200000 200000 0.21% 0.00%

Alphageo* 125000 125000 0.13% 0.00%

Aptech 15706503 0 0.00% -100.00%

Dwarikesh Sugars 450000 0 0.00% -100.00%

Total 116570995 97524434

DISCLAIMER

DISCLAIMER: The author is not a registered stockbroker nor a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and that you confirm the facts on your own before making important investment commitments.