Fundamental Analysis

How to Effectively use "PE & PEG Ratio" I came across a stock trading at a PE of 60. It looked so expensive. I thought, "Who in their mind would buy this?" Meanwhile, another stock was trading at PE 12. Cheap, right? I thought I had found a hidden gem. Fast forward five years... - The "expensive" stock had grown 10x. - The "cheap" stock was still struggling at the same level. That’s when I learned a painful truth—PE ratio alone is useless. Let me show you what I learned. 1. The PE Ratio Trap PE (Price-to-Earnings) Ratio = Stock Price / Earnings Per Share (EPS) It tells us how much investors are willing to pay for ₹1 of a company's earnings. Example: A stock trading at ₹100 with an EPS of ₹10 has a PE of 10 (₹100/₹10). Most people assume: Low PE = Cheap stock High PE = Expensive stock I did too. And I was wrong. Here’s why: - Low PE means undervaluation: Some stocks trade at a low PE because they have no growth, bad management, or declining business. - High PE means overvaluation: Great businesses with consistent earnings growth always trade at a high PE. - PE alone is enough to judge a stock: PE ignores growth. A stock with a high PE but strong earnings growth can still be a bargain. 2. The Game-Changer: PEG Ratio Imagine you’re buying a car. One car costs ₹5 lakh and gives 20 km/l mileage. Another costs ₹8 lakh but gives 40 km/l mileage. Which one is truly “cheaper”? This is exactly what PEG Ratio does—it adjusts for growth. PEG (Price-to-Earnings Growth) = PE Ratio / EPS Growth Rate (%) Example: - A stock with PE 30 and earnings growth of 40% has PEG 0.75 → Undervalued -A stock with PE 20 and earnings growth of 5% has PEG 4 → Overvalued A stock with PE 30 can be cheaper than a stock with PE 20—if it has strong growth. 3. Where Can We Find Earnings Growth Data? 👉 *****