It is the ratio of the market price of the share with the company’s earnings per share. It indicates how much value of a share is in multiple of the earnings of the company per share.
PE multiple is used by the analysts as one of the parameters for the purpose of identifying whether the company’s share is over or underpriced. This analysis is performed by comparing PE multiple of the company with the PE multiples of its peers or the PE of the industry to which the company belongs.
In the below infographic, you can see the PE multiples of the top 7 banking companies including public and private banks in the Indian stock market. These top 7 banks has been identified based on the market capitalization of listed banking companies. Also, the PE of these top 7 banks has been compared with the sector PE. For sector PE, we have considered the PE multiple of Bank Nifty index as on the mentioned date.
It is one of the parameters where you compare the PE multiple of the company with its sector PE and identify where the company in terms of PE valuation lies.
As per the above infographic, PE multiple of HDFC Bank is 21.29 while the PE of Bank Nifty index is 25.29. Since the PE multiple of HDFC bank is below the sector PE, it indicates that there can be a potential increase in the market price of the HDFC bank in line with an increase in earnings of the company and it may come up in line with the sector PE. In the same way, you can analyze for the other banking companies and identify the position of those based on PE multiple indications.
While analyzing the company on the basis of PE multiple, you must need to consider other factors as well. Like, you should consider the prices of the shares for a certain period instead of a particular day. The company’s share prices are impacted by various market forces like demand and supply, investor’s sentiment, market news, industry news, economy, etc. So, there are great chances that a particular day shall have the impact of such temporary and mid-term market forces or events. To discount this impact, you can consider the market prices of the share for a considerable period like the prior 2 months and then calculated the weighted average price of the share for the prior 2 months by allocating higher weights to the recent period.
Also, the investment decision should not be made only on the basis of the PE multiple analysis and other indicative factors along with fundamental & technical analysis of the company shall be performed based on the expectations of the investor.
Through this infographic, you could understand the comparison of PE multiple of the banking company with the sector and factor to be noted while considering the market price of the share for the purpose of calculation.
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