0PE Industry
Plain depiction:-
Industry PE = X
Company PE = Y
Interpretations
X =Y
- Indifferent
- company is growing along the industry
- gradual growth ,
X>Y =Situation 1
- Company may be undervalued
- Company may be under performing
X
- Company may be overvalued
- company may be good performer
As you can see from 1 &2 there can be two contradictory information from same analysis, this would result again in an indifferent decision on our part.
Hence
As like any numbers for evaluation, it does not give a clear depiction of the underlying behavior, unless we looked at in a comprehensive sense with other parameters, making your decision merely because of PE, would only be a generalized bet, but if you are going to use it on a fundamental level, you have to use it with other factors to assure the number base is strong.
Industry PE
Industrial P/E is usually considered a Bench mark P/E for the particular Industry
Eg, Steel Sector PE 12 means. A company which deals in this sector is at least expected to perform at PE 12 or more, anything less than that would be considered inefficiency or investment opportunity as the case may be .
It’s an average that formed over the years.
It helps a firm to benchmark it’s market growth to Industry standards so that, it can work out where it’s lagging behind.
Before going any further PE & CMP/BV are one of main factors while choosing a stock for investors.
Now let’s look at question in Two Parts - One regarding PE Ratio & Other regarding CMP/BV
As regarding PE Ratio- Higher the PE ratio higher the market capitalization is, which means when market capitalization is higher its not preferred since growth prospect for these companies are relatively lower with lower PE Ratio
Hence Decision
PE Higher - Tread Carefully
PE Lower - Invest
Hence in this case when comparing for investments always one with PE Lower is preferred.
AS regarding CMP/BV- Deduct CMP from BV ,what you get is the value market sees , assuming it’s a natural number, higher the difference higher the market capitalization is ,that means higher the capitalization ,lower is the potential for further growth.
Hence Decision
First Deduct CMP-BV = x, (Assumed)
X higher=Don’t Invest
X Lower = Invest
Hence in this case when comparing for investments always one with Lower X is preferred
If other fundamentals being strong and BV is above CMP, it’s a perfectly undervalued share with higher Intrinsic Value - Always Invest
