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Value And P/E

         In Assam, we have seen that lots of people talk about the stock price but no one is concerned about the valuation of the company. Everybody is talking about "aji 100 asil kaile 110 hoi jabo"; " abbe 2000 eta share r dam emn dami company kom dami share ko" . But the main thing is not the price of the share; it is all about the valuation of the company. No one is interested in reading a line about what the fucking P/E, P/B, ROE, and ROCE are ?

         Let's first look at the "dami share kom dami share" concept. Consider A and B to be two companies. A has a $100 share price and B has a $2,000 share price. Which one is "dami share kom dami share"?? Just think for a moment .If A having number of share 400 and B having number of share 20. In both cases, the market capitalization of both companies will be the same. 

Market Cap= Share price x number of share

 

For Company A=100x400=40,000

For Company B=2000x20=40,000

            It shows that it is not about the price of the share; it is all about the market cap of the company. I don’t know much about the market, if I scale my market knowledge on a scale of 0-10 , I will score less than 1. But this one is a simple concept that anyone can understand. If you ask me, I would choose Company B because the number of shares is lower, so liquidity is lower, and traders will avoid such stocks, which will help the company weather the turbulent market conditions.

            Let's see which one is the most expensive. Consider another scenario for these two companies: they both have the same market capitalization of $40,000 but make different profits. Let company A make $3,000 in profit and company B make $8,000 in profit. Then I will prefer company A. Now check how the P/E of these companies will express it.

Here for A

Market Cap=40,000

Share price=100

No of share= 400

Profit =3000

 

        Fist we have to calculate Profit per share, that is Earning Per Share(EPS)= total profit/no of share=3000/400=7.5

  Now the P/E, which is Price to earning Ratio, P/E= Share price/EPS=100/7.5=13.33

 

Here for B

Market Cap=40,000

Share price=2000

No of share= 20

Profit =1800

 

    Fist we have to calculate Profit per share, that is Earning Per Share(EPS)= total profit/no of share=1800/20=90

    Now the P/E, which is Price to earning Ratio, P/E= Share price/EPS=2000/90=22.22

 

        Here In the case of two companies with the same market cap but different profits, we can tell which one is undervalued by looking at its P/E ratio. So it is necessary to see the P/E before investing in any company.

Now the next thing comes that how-to analysis P/E… In Next

 

(I write it just for my fun and record. I am not a sebi registered analysis or planner.)

-       Shaishab

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