What is Low PE Ratio Stocks – A Brief Overview
Understanding key financial ratios is critical to making informed investment decisions as an investor. One such ratio that is commonly used to evaluate the value of a stock is the price-to-earnings (PE) ratio. The PE ratio is a widely used metric for assessing the relative value of a company’s stock by comparing its current stock price to its earnings per share (EPS). However, today, we will discuss the definition of a PE ratio, explain why low PE ratio stocks can be attractive, list of low PE ratio stocks, and provide strategies for identifying low PE ratio stocks. Let’s begin.
What is PE Ratio?
The PE ratio is a widely used valuation ratio that helps to determine the relative value of a company’s stock. While a high PE ratio may indicate that a company is more expensive relative to its earnings, it may also suggest that the company has strong growth potential. Therefore, comparing PE ratios across different companies can also help you to identify undervalued opportunities within the same industry.
What are Low PE Ratio Stocks?
A low PE ratio is a valuation metric that indicates a stock’s price is low relative to its earnings. You may generally consider low PE ratio stocks undervalued and may present an attractive investment opportunity.
Thus, identifying PE ratio stocks is important because it can help you find undervalued companies. As these companies may have strong growth potential and generate higher returns in the long run. The low PE ratio shares may also offer a margin of safety in case of adverse market conditions.
How to Calculate Low PE Ratio Shares?
Calculating a low PE ratio involves comparing a stock’s PE ratio to the average PE ratio of the stock market or sector. Here’s how to calculate low PE ratio:
- Determine the Market or Sector Average PE Ratio: Find the average PE ratio of the market or sector that the stock belongs to. This can be found through financial news sources or online stock screeners.
- Calculate the Stock’s PE Ratio: Divide the stock’s current market price per share by its earnings per share (EPS) over the last 12 months. The formula for calculating PE ratio is as follows:
| PE Ratio = Market Price per Share / Earnings per Share |
- Compare the Low PE ratio Share: If the stock’s PE ratio is lower than the average PE ratio, it may be considered to have a low PE ratio.
For example, if the average PE ratio of the Nifty 50 index is 25 and a stock has a current market price of ₹50 per share and an EPS of ₹5, then its PE ratio would be 10. Since this is lower than the average PE ratio of the Nifty 50. This means low PE stocks in Nifty 50 to have a low PE ratio.
List of Low PE Ratio Shares
Now, since we have covered the basics, it’s time to look at low PE ratio stocks of companies to understand the concept better. Therefore, we have divided companies into three categories – large cap, mid cap, and small cap based on parameters like Market Cap, PE Ratio, Return on Capital Employed (ROCE), and Debt to Equity (DE) Ratio.
1. Popular Large Cap Companies With Low PE Ratio Stocks
| Company Name | Market Cap (in Cr) | PE Ratio | ROCE | DE Ratio |
|---|---|---|---|---|
| ICICI Bank Ltd | ₹6,41,110 | 18.92 | 7.11 | - |
| State Bank of India | ₹5,16,268 | 14.51 | 3.87 | - |
| HCL Technologies Ltd | ₹2,88,176 | 19.46 | 28.29 | 10.23 |
Brief Overview of Large Cap Companies
- ICICI Bank Ltd: A leading private sector bank in India with a wide range of financial products and services.
- State Bank of India: The largest public sector bank in India, offering a wide range of banking services to individuals and businesses.
- HCL Technologies Ltd: A global IT services company that offers a range of technology solutions to clients across industries.
2. Popular Mid Cap Companies With Low PE Ratio Stocks
| Company Name | Market Cap (in Cr) | PE Ratio | ROCE | DE Ratio |
|---|---|---|---|---|
| Shriram Finance Ltd | ₹49,911 | 8.87 | 5.85 | 440.12 |
| Info Edge (India) Ltd | ₹48,685 | 3.84 | 73.47 | 0.35 |
| Power Finance Corporation Ltd | ₹44,868 | 3.27 | 3.10 | 686.03 |
Brief Overview of Mid Cap Companies
- Shriram Finance Ltd: A leading non-banking financial company in India, specializing in loans and other financial products for retail and small business customers.
- Info Edge (India) Ltd: A leading online classifieds and job portal company in India, with a diversified portfolio of businesses.
- Power Finance Corporation Ltd: A leading non-banking financial company in India, specializing in financing power sector projects.
3. Popular Small Cap Companies With Low PE Ratio Stocks
| Company Name | Market Cap (in Cr) | PE Ratio | ROCE | DE Ratio |
|---|---|---|---|---|
| Lloyds Metals And Energy Ltd | ₹16,331 | -56.81 | - 47.14 | 16.02 |
| Exide Industries Ltd | ₹16,652 | 3.75 | 42.29 | 4.89 |
| Trident Ltd | ₹15,654 | 19.58 | 26.81 | 41.53 |
Brief Overview of Small Cap Companies
- Lloyds Metals And Energy Ltd: A fast-growing metals and energy company in India, with a focus on sustainable development and innovation.
- Exide Industries Ltd: A leading battery manufacturer in India, with a strong presence in the automotive, industrial, and other sectors.
- Trident Ltd: A leading textile manufacturer in India, with a focus on quality and sustainability across its operations.
Why Low PE Ratio Shares are Attractive?
Let’s have a look at the various reasons that make low PE indian stocks an attractive investment option.
- Potential for Higher Returns: The market may undervalue low PE ratio shares, which means that their current price may not reflect their true value. Thus, if the market eventually recognizes the true value of the stock, you can potentially realize higher returns on their investment.
- Lower Risk: Low PE stocks can also indicate that a stock has a lower level of risk associated with it. This is because you are paying less for each dollar of earnings generated by the company, which can provide a margin of safety if the company faces challenges or headwinds.
- Attractive Valuation: Low PE ratio stocks can be an attractive valuation opportunity. A low PE ratio stock can indicate that the stock is trading at a discount relative to its peers or the broader market, making it an attractive purchase opportunity.
- Favorable Market Conditions: Low PE ratio shares may also perform well during periods of market volatility or economic uncertainty. Thus, you may flock to lower-priced stocks with lower PE ratios as a defensive strategy during uncertain times.
- Diversification: Including low PE ratio stocks in a diversified portfolio can help spread risks and potentially enhance returns. Thus, by portfolio investing, you get a mix of high and low PE ratio stocks, balance your portfolio and potentially achieve better overall returns.
Example of Low PE Ratio Shares
Suppose there are two companies operating in the same industry with similar financials and market capitalizations. Company A has a PE ratio of 10, and Company B has a PE ratio of 20. This means that Company A’s stock price is ₹10 for every ₹1 of earnings, while Company B’s stock price is ₹20 for every ₹1 of earnings.
In this scenario, Company A is said to have a low PE ratio compared to Company B. Thus, this suggests that the market is undervaluing Company A’s earnings potential, which can be an attractive buying opportunity. On the other hand, Company B may be overvalued, and you may want to exercise caution before investing in the stock.
It’s important to note that low PE stocks doesn’t necessarily mean a stock is undervalued or a good investment opportunity. Therefore, you should conduct thorough research and analysis of a company’s financial health, management team, growth prospects, and market conditions before making an investment decision.
Strategies For Identifying Low PE Ratio Stocks
Here are some strategies for identifying low PE ratio stocks:
- Use Stock Screeners: Online stock screeners allow you to filter and sort stocks based on various metrics, including PE ratio. This can be a quick and easy way to identify stocks with low PE ratios.
- Analyze Company Financial Statements: You can examine a company’s financial statements, such as its balance sheet and income statement, to calculate its PE ratio. This can help you to identify low PE ratio shares.
- Look for Undervalued Stocks: You can use fundamental analysis and other valuation metrics to identify undervalued stocks with low PE ratios.
- Consider Investing in Index Funds or ETFs: Index funds and ETFs offer exposure to a diversified portfolio with low PE ratios stocks. For example, there are ETFs that track the Nifty Low Volatility 50 Index, which consists of 50 low-volatility stocks with relatively low PE ratios.
To Wrap It Up…
Since low PE ratio stocks are undervalued, they can provide good returns. However, you should not solely rely on the PE ratio when making investment decisions. Be sure to examine the company’s financials, the industry PE ratio, and other fundamental metrics. Furthermore, investing in low PE ratio stocks comes with inherent risks, such as market volatility and potential losses. Therefore, you should consider diversifying portfolios and associated risks when investing in low PE ratio stocks. At last, take time to consider the investment objective, risk tolerance, and timeframe of the investment.
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