Stock Analysis: Key Parameters

Important Parameters for Stock Purchase

• EPS (Earnings Per Share)

  • Indicates the profitability of a company.
  • Calculate by dividing the net profit by the number of outstanding shares.
  • Example:
    • Total Profit: ₹100,000
    • Outstanding Shares: 10,000
    • EPS = ₹100,000 / 10,000 = ₹10
  • Higher EPS generally indicates better profitability.

• PE Ratio (Price to Earnings Ratio)

  • A valuation ratio.
  • Calculates how much investors are willing to pay for each rupee of earnings.
  • Formula: PE Ratio = Market Price per Share / EPS
  • Can help identify if a stock is overvalued or undervalued.

Considerations for EPS

• Companies may buy back shares, affecting outstanding shares and skewing EPS.
• Misleading EPS can arise if companies manipulate outstanding shares through buybacks.
• EPS alone does not indicate the complete picture of a stock's value.

Analyzing PE Ratio

• PE ratio helps in interpreting whether a stock is overvalued or undervalued.
• Example:
  • If a company's PE is significantly lower than the sector average, it might indicate undervaluation.
  • Example of companies:
    • XEL has PE of 23, while sector has PE of 27.
    • TCS and Infosys have higher valuations compared to HCL and Wipro, which are considered undervalued.

Understanding Stock Valuation with Real Examples

• Cold India

  • PE of 4.5 but negative returns over 13 years.
  • Indicates poor investment despite low PE.

• ONGC

  • Historical PE ratios at 20, 27, and currently low PE (4-4.5) do not guarantee positive returns.

Conclusion on Investment Decisions

• Look beyond PE and EPS to consider a company's fundamentals.
• High PE ratio could indicate strong investor confidence in future growth.
• Market overall should be evaluated for fair value and trends.

Market Insights

• Nifty's PE ratios can indicate market conditions:
  • A low PE may indicate undervaluation; high PE could show overvaluation.

Final Note

• Continuously monitor investment conditions and market movements to optimize investment strategies.

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