Explains the meaning, significance, method of calculation and how to use the 'Price to Earnings' or 'PE' Ratio.

1. Welcome
Value Investing Fundamentals Part 1

2. Value Investing Fundamentals Part 1
• Relationship between ‘Market Price of
Share’ and ‘Earnings Per Share’;
• Indicates in how many years the
investment will be earned back;
• Focuses attention on need to compare
the paybacks of the share and a fixed
income security like bond;

3. Value Investing Fundamentals Part 1
Relationship between ‘Market Price of Share’ and ‘Earnings Per Share’;

4. Indicates in how many years the investment will be earned back
Price =
Rs.100
E.P.S. =
Rs.10
THEREFORE
PE and Payback
Period are 10
Years

5. Price =
Rs.90
THEREFORE
PE and Payback
Period are 3
Years
E.P.S. =
Rs.30

6. Focuses attention on need to compare the paybacks of the share and a
fixed income security like bond

7. Focuses attention on need to compare the paybacks of the share and a
fixed income security like bond

8. When the E.P.S., the denominator, is a negative number (the company
has suffered a loss) then the PE Ratio will be negative!
Price =
Rs.100
E.P.S. =
Rs.-9.50

9. • ‘Price to Earnings Ratio’ must be less than 10;
• It should not be a negative figure;
• Smaller the positive number than 10, that much better it is, as
the payback period for the investment becomes that much
shorter;
• Do not go by one year E.P.S. Derive the PE Multiple by dividing
the price by Average EPS of the last five to 10 years (this is to
ensure that we are not mislead by an odd exceptional good
performance by an otherwise loss making company)

10. Value Investing Fundamentals Part 1
Thank you