Which is a better measure of Valuation ~ ๐ฃ/๐ ๐ผ๐ฟ ๐๐ฉ/๐๐๐๐ง๐๐?
Let's find outโคต๏ธ
#StockMarketIndia #Finances
Let's find outโคต๏ธ
#StockMarketIndia #Finances
๐ช๐ต๐ฎ๐ ๐ถ๐ ๐ฃ/๐ ๐ฅ๐ฎ๐๐ถ๐ผ?
โฑFormula: Price of 1 Share รท Earnings Per Share (EPS)
โฑMeaning: How much โน investors are willing to pay for every โน1 a company earns.
Think of P/E as the price you pay for a restaurant's meal vs. how tasty (valuable) that meal actually is.
โฑFormula: Price of 1 Share รท Earnings Per Share (EPS)
โฑMeaning: How much โน investors are willing to pay for every โน1 a company earns.
Think of P/E as the price you pay for a restaurant's meal vs. how tasty (valuable) that meal actually is.
๐๐ฟ๐ฎ๐๐ฏ๐ฎ๐ฐ๐ธ๐ ๐ผ๐ณ ๐ฃ/๐ ๐ฅ๐ฎ๐๐ถ๐ผ ๐จ
1๏ธโฃIt ignores debt:
โข P/E only looks at equity value
โข If a company has huge loans, it might show a low P/E and look cheap, even if itโs not.
1๏ธโฃIt ignores debt:
โข P/E only looks at equity value
โข If a company has huge loans, it might show a low P/E and look cheap, even if itโs not.
2๏ธโฃP/E reflects market perception:
โข Share price (numerator) is decided by investors.
โข High-growth or โfamousโ companies often get a higher P/E.
โข Share price (numerator) is decided by investors.
โข High-growth or โfamousโ companies often get a higher P/E.
3๏ธโฃGrowth Matters:
A P/E ratio alone isnโt enough.
Why? A company growing 20% every year will justify a higher P/E than one growing 5%.
A P/E ratio alone isnโt enough.
Why? A company growing 20% every year will justify a higher P/E than one growing 5%.
๐ช๐ต๐ฎ๐ ๐ฎ๐ฏ๐ผ๐๐ ๐๐ฉ/๐๐๐๐ง๐๐ ๐ฅ๐ฎ๐๐ถ๐ผ? ๐คThis ratio has 2 parts:
1๏ธโฃ EV (Enterprise Value) = What it costs to buy the entire company today.
Formula: Equity Value + Debt โ Cash
1๏ธโฃ EV (Enterprise Value) = What it costs to buy the entire company today.
Formula: Equity Value + Debt โ Cash
2๏ธโฃ EBITDA = Operating Profit before interest, tax, depreciation & amortization.
Basically, What the business earns from operations.
Basically, What the business earns from operations.
Let's simplify EV with a Shop Example:
Imagine youโre buying a shop for โน10L.
๐น The seller has a โน2L loan
๐น The shop has โน3L cash in its tijori
Your actual โcostโ of acquiring the shop:
โน10L (price) + โน2L (loan) - โน3L (cash) = โน9L
Thatโs the Enterprise Value (EV)
Imagine youโre buying a shop for โน10L.
๐น The seller has a โน2L loan
๐น The shop has โน3L cash in its tijori
Your actual โcostโ of acquiring the shop:
โน10L (price) + โน2L (loan) - โน3L (cash) = โน9L
Thatโs the Enterprise Value (EV)
๐ช๐ต๐ฎ๐ ๐ฎ๐ฏ๐ผ๐๐ ๐๐๐๐ง๐๐?
It's like looking at a shop's core profits without worrying about extra costs like:
โข Loan interest payments
โข Taxes
โข Depreciation of assets
Why?
Bcoz these costs vary by business, & EBITDA helps compare their true operating performance
It's like looking at a shop's core profits without worrying about extra costs like:
โข Loan interest payments
โข Taxes
โข Depreciation of assets
Why?
Bcoz these costs vary by business, & EBITDA helps compare their true operating performance
๐๐ฉ/๐๐๐๐ง๐๐: ๐ช๐ต๐ฎ๐ ๐ฑ๐ผ๐ฒ๐ ๐ถ๐ ๐บ๐ฒ๐ฎ๐ป?
It tells you the payback period for your investment.
Example:
If EV = โน2000 Cr & EBITDA = โน200 Cr:
EV/EBITDA = 10x
Meaning: Itโll take 10 years for the companyโs operating profits to repay your investment.
It tells you the payback period for your investment.
Example:
If EV = โน2000 Cr & EBITDA = โน200 Cr:
EV/EBITDA = 10x
Meaning: Itโll take 10 years for the companyโs operating profits to repay your investment.
๐ช๐ต๐ถ๐ฐ๐ต ๐ฅ๐ฎ๐๐ถ๐ผ ๐ถ๐ ๐๐ฒ๐๐๐ฒ๐ฟ? โ๏ธ
โฑ P/E Ratio: Best for sectors with high growth & low debt (e.g., IT).
โฑ EV/EBITDA: Best for capital-intensive sectors with high debt, like:
โข Cement๐๏ธ
โข Steel ๐ข
โข Telecom ๐
It accounts for debt and gives a clearer picture.
โฑ P/E Ratio: Best for sectors with high growth & low debt (e.g., IT).
โฑ EV/EBITDA: Best for capital-intensive sectors with high debt, like:
โข Cement๐๏ธ
โข Steel ๐ข
โข Telecom ๐
It accounts for debt and gives a clearer picture.
Final Verdict ๐
โข Use P/E for growth-focused, low-debt companies.
โข Use EV/EBITDA for high-debt sectors or M&A analysis.
Smart investors use both depending on the situation.
Whatโs your favorite ratio? Drop your thoughts belowโคต๏ธ
โข Use P/E for growth-focused, low-debt companies.
โข Use EV/EBITDA for high-debt sectors or M&A analysis.
Smart investors use both depending on the situation.
Whatโs your favorite ratio? Drop your thoughts belowโคต๏ธ
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