Price Earning ratio is easy to calculate!

The most misused and least understood ratio is the Price Earning ratio or the P E Ratio….Almost everybody who ‘invests’ talks about P/E ratio. I am sure there are many people who do not understand the full form but use it nevertheless.

Well when a company earns Rs. 20 as its annual earnings, and is quoting in the markets at Rs. 600, it is said to have a P/E ratio of : 600/ 20 = 30.

The p/e ratio is the ‘discounting’ factor or the no. of years ‘purchase’ value of a share. Thus P/e ratio of ‘A’ Ltd is 30 – which means JUST on the basis of running the company at the same speed, it will take 30 years to recover the cost of the ‘purchase price’.

The other way of looking at it is to see at what rate will the company grow over the next few years – whether the core growth will match the markets expectation of a 30% growth.

Having said all this, when a company is respected by the market, it gets a good p/e ratio. I am not even getting into whether it is justified, because that will be done later on. The Tata group gets a good p/e ratio amongst Indian corporates – and is thought to be well managed. Similarly L&T, Hdfc, Hdfc Bank, Sundaram Finance, Asian Paints, and another bunch of Indian companies do get a good price earning ratio. The other way to say this is to say ‘these shares are well discounted. Not sure why but generally companies that are more visible gets discounted better…

The MNCs get a discounting far better than the Indian companies – so HUL, Colgate, ITC (Omg do I need to explain or defend this?), Nestle, Cummins, ….get a better discounting. These are all companies with ‘foreign’ management and Indian executives…

It is said that they are honest management.

REALLY?

The ‘so called’ honest management of Hul, Colgate, Nestle, ….have no qualms about ripping the customer apart. For all these companies the margins are TERRIBLY high. The fact that they share it with you cannot be THE reason why this becomes a good company.  Now this high margin is not available to the other manufacturers for whatever reasons!

So the parent says ‘You need to pay us more because you are using our brand name’. Really? who spent on making the brand more popular? The Indian subsidiary which had a  huge advertising budget…

So we are NOW paying a price for a product which is OURS ANYWAY!!

The other way to look at it is to say at least they are being open about it, unlike the Indian managements….

 

In oe case

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3 Responses to “Price Earning ratio is easy to calculate!”

  1. Subra,

    I see some cynicism here. I do not agree with your statements.
    Multinationals or Indian companies, it does not matter to the common man. Both managements take away their money. The profits are not distributed to poor needy people. How does matter if the owners are Indian or foreign?
    Atleast I can see that the multinationals are honest in doing business. They pay all their taxes and do not find ways of cheating the tax collector. As regards profitability, I feel with open competition, each product deserves its place in the market place. If there is too much margin someplace, you will see some indian startup coming up to fil the space. Take the example of Nirma. Indian entreprunersa re quite smart in this. also look at the pharma sector where number of generics are being created where opportunity exists.
    By opening our markets to foreign companies, we will create more jobs.

  2. I think this practice of MNC’s paying back the parent, often in proportions much more than the attributable share holding pattern is one aspect that SEBI has to get its act right. An overpayment is actually fleecing the retail investor. However, of late, I believe flows have been in opposite direction. Check http://www.business-standard.com/article/companies/unilever-offers-5-4-bn-to-raise-hul-stake-to-75-113043000142_1.html

  3. So first Indian Customers paid more & now Indian shareholders are getting less.. Then in future????

    Atleast they are saying it publicly unlike India management who siphon off money

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