NSE is a popular Indian stock exchange. It has been a part of the Indian market since 1990 and has a market capitalization of around INR 8 trillion (US$120 billion). But what is the Price Earnings Ratio or PE ratio?
On www.nseindia.com, the PE ratio is defined as the ratio of a company’s share price and the EPS, i.e. earning per share. The PE ratio is used to compare how much investors are paying for each rupee of company earnings.
What is the NSE PE ratio today?
The PE ratio on NSE India is currently at 20, the same as it has been for the last 20 years. It means that for every rupee in earnings, an investor pays 20 rupees for it on the stock market. So, the PE ratio below 20 can provide good investment opportunities.
NSE PE today does not provide a uniform indication. Market PE of NSE keeps changing with crests and troughs in the stock market and changing valuation of stocks.
How to check the NSE PE ratio?
As a market investor, you should know how to check the NSE PE ratio. A formula to calculate PE is the market price of the share / earnings per share. Calculating the NSE India PE ratio is no different. Let’s take an example of a listed company in NSE and calculate its PE ratio.
Mahindra finance has a share price of ₹170.35 and EPS (TTM, i.e. trailing 12 months) of 9.20. PE = ₹170 / 9.20 = 18.4.
It means that 18.4 is the premium that has to be paid to earn ₹1 from a stock of Mahindra Finance.
Note! TTM is an acronym used for the past 12 Months’ performance of a stock indicator from the present date. Other EPS values can be found in quarterly or annual company releases.
Calculating the PE ratio of NSE India is not too different. But how to check PE in NSE? It can be accessed on the NSE website:
- Look for the NSE PE check on the website.
- To access the NSE PE ratio data, choose the start and end dates you want to check the PE ratio, and click on “Get Data”.
Also, you can calculate it using this formula: Index market capitalization / Gross earnings, where:
- Index market capitalization is the sum total of the outstanding equity shares.
- Gross earnings are the sum of profits and losses reported by each index constituent in the trailing 4 quarters adjusted for free float, capping factor, etc.
Types of PE ratios and their meanings
In the world of PE ratios, there are three different types. These range from high to low and Negative. It’s important to know what these PE values indicate.
A high PE ratio occurs when a company has more assets than liabilities on its balance sheet. It is a good indication because it means that the company has money coming in from investments and other sources which exceed the debts owed to creditors and investors.
A low PE ratio means that the company is undervalued. It can be because the company has a lot of growth potential, and the market might not have realized this. On the contrary, it can also mean that the company is not generating enough cash to pay for its investments.
A negative PE ratio occurs only when a company’s earnings fall below the average of its PE ratio, or the EPS is negative. This ratio can be found in companies not reporting their EPS for subsequent quarters. It can happen for several reasons, but it is most likely to happen when the company is losing money.
Note! You must buy shares of a company with low PE only if its vision is clear and fundamentals are strong. Such stocks can often lead to significant profits.
An essential function of the NSE PE ratio is that it provides a way to estimate the company’s profitability and invest in the right stocks. As a stock market investor, it’s ideal to look for stocks with a low PE ratio and good fundamentals. Such stocks often turn out to be multi-baggers and can earn tons in profit.
On the contrary, such stocks are difficult to find. Most profitable companies have a very high PE ratio compared to the industry average. It’s important to have patience and wait for them to come down to a fair value before purchasing.