Is High PE Ratio Stocks Always Risky To Buy

Table Of Content :

• What Is P/E?
• Price of Share
• Earning Per share
• Formula to calculate P/E Ratio
• P/E is 5 what does it means?

One of the key factor one looks while buying a share is PE Ratio.We all believe that if the PE is low then the share is undervalued and we generally avoid buying high PE stocks,as it is considered as overvalued.
But this is not always correct. To understand this we need to know 

What Is P/E?

PE is actually Price Of a Share divided by its Earning per share. (EPS),So there are two things :

1)Price of Share: 

 It is the market price per share of a company.This is the price by paying which we buy a share in the share market,also termed as market price of a share.

2)Earning Per share:

 As the name suggest it is the earning /net profit of a company divided by the total number of shares of the company.

If the Earning per share decreases,the PE ratio will increase,provided the price of the share remains same.
Also ,if the price of the share increase the PE ratio will also increase,provided the earning per share remains same.

 Formula to calculate P/E Ratio

To undersatnd it better let us take an example:
Company named A is trading at a price or Rs.50/share and the earning per share is Rs.10,
So the PE would be 50/10 = 5.

P/E is 5 what does it means?

P/E ratio is 5,it means the share price is 5 times of its earning.

So, higher the P/E dearer is the share,and lower the PE cheaper is the share,this is a common understanding.
If a share is trading at high PE, it means the buyer is ready to pay high price for a comparatively low earning .Think, why one is ready to pay high price.This is because of the expectaion of its going higher.If this expectation is just an expectation,it can erode your money. But if the this expectaion is based on some logic it would be right decision. But what is the logic?
When a company's earning is at a point from where it would grow exponentially going forward,its price could be higher in comparison to earning at this point,that is, it is  trading at high PE.Buying at this inflection point woud be rewarding.
But to identify this point is a real challenge.