Voyaging the exciting field of value investing requires scholarship of
some central yet simple financial metrics of which ‘Price to Earnings Ratio’, also
christened ‘PE Ratio’, is a key member. In the present essay, let us discover
it.
As the title indicates, the proportion
has two components, Price and Earnings. Price is the current market
price of the stock and earnings is ‘Earnings Per Share’ or ‘EPS’, the meaning
and the mode of computation of which are published in separate articles,
elsewhere on this site.
Continuing with the example of NMDC Ltd.
used in the other essay, summarized information assembled from the audited
financial statements of NMDC Ltd., for the financial year 2014-15 show:
Operating revenue 12356.41, total expenses 4740.29,
non operating income 2265.40, exceptional items of charge 113.01, corporation
tax 396.47 and miscellaneous debits 0.44.
All numbers are expressed in Indian Rupees (Rs.) in crores (10 millions) and the company has an equity
capital of Rs.396.47 crores of nominal value of Rs.1 each, that is 396.47 crore
shares.
On drawing up the profits and loss statement, the results will be
as follows:
|
|
Rs. In crores (one crore = 10 millions)
|
|
Total Operating Revenues
|
12,356.41
|
|
Total Expenses
|
4,740.29
|
|
Operating Profits
|
7,616.12
|
|
Non Operating Revenues
|
2,265.40
|
|
Profit Before Exceptional Items
|
9,881.52
|
|
Exceptional Items
|
113.01
|
|
Corporate Income Tax
|
3,346.21
|
|
Miscellaneous Charges
|
0.44
|
|
Net Profit for the year
|
6,421.86
|
|
Number of Equity Shares (In crores (10
millions) of nominal value of Rs.1 each
|
396.47
|
|
Applying the formula EPS = Net Profit ÷ number
of equity shares
|
|
|
Earnings Per Share – Rs. Per share
|
16.20
|
The current market price (CMP) of the
scrip on the website of the popular financial newspaper ‘The Economic Times’
today, 26th July, 2016, is Indian ‘Rupees’ 100.25.
‘Price to Earnings’ is obtained by
dividing the CMP by the EPS.
Therefore, PE = 100.25 ÷ 16.20 = 6.19.
Recommended PE multiple for making a
purchasing decision is a number below 10, and this scrip meets the criterion.
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