The price-to-earnings ratio is a commonly used metric by investors and analysts to assess the valuation of stocks. It helps determine if a company’s stock price is either overvalued or undervalued and provides insights into how the stock’s valuation compares to its industry or benchmarks.
The P/E ratio is a useful tool for investors to evaluate the market value of a stock relative to the company’s earnings. It indicates the price that the market is willing to pay for a stock based on its historical or projected earnings.
If the objective is to achieve returns higher than the overall market returns, those investors would fall into the category of a growth investor. As growth investors, they would typically focus on companies with higher-than-average price-to-earnings ratios compared to typical industry benchmarks.
Investors anticipate rapid revenue and earnings growth from companies in the start-up or growth stages, which is why these companies often have high P/E ratios. A high P/E ratio can reflect positive expectations already priced into the stock. As long as the positive news continues, the high ratio may persist. However, it’s important to note that higher returns come with increased risk when investing in growth stocks.
Conversely, some stocks have low P/E ratios, indicating that they are undervalued. There can be various reasons for a low P/E ratio. One possibility is that investors are avoiding the company and its sector, as they perceive other areas to offer greater potential returns. Another reason could be minimal or no growth, with a significant portion of capital being reinvested into the business due to sector changes.
Following are the stocks trading at a high price-to-earnings ratio in the market.
| S.No | Name | CMP Rs | P/E | Sales Growth 3Yrs % | Profit Growth 3Yrs % | Div Yld % | 3mth return % | 1Yr return % |
| 1 | Remedium Lifecare | 4,120.0 | 273.2 | 460.9 | 168.7 | – | 306.0 | 2,823.4 |
| 2 | Orchid Pharma | 507.0 | 185.3 | 11.2 | 28.2 | – | 31.9 | 81.7 |
| 3 | Hardwyn India | 43.7 | 168.6 | 121.4 | 348.6 | – | 124.4 | 246.7 |
| 4 | Olectra Greentech | 1,323.0 | 165.6 | 75.9 | 200.5 | 0.0 | 101.9 | 123.1 |
| 5 | Servotech Power Systems | 156.0 | 156.9 | 41.0 | 129.9 | 0.0 | 215.3 | 1,070.4 |
| 6 | Spectrum Electrical Industries | 813.1 | 146.0 | 22.3 | 21.6 | 0.1 | 119.6 | 1,375.1 |
| 7 | Suzlon Energy | 18.0 | 130.8 | 26.2 | 27.4 | – | 114.2 | 182.1 |
| 8 | Force Motors | 2,609.9 | 109.4 | 17.8 | -27.0 | 0.4 | 95.0 | 152.9 |
| 9 | TARC Ltd | 64.6 | 93.7 | 38.9 | -27.4 | – | 42.5 | 75.2 |
| 10 | Zen Technologies | 467.4 | 89.5 | 13.6 | -10.9 | 0.0 | 38.0 | 144.3 |
Following are the stocks trading at a low price-to-earnings ratio in the market.
| S.No | Name | CMP Rs | P/E | Sales Var 3Yrs % | Profit Var 3Yrs % | Div Yld % | 3mth return % | 1Yr return % |
| 1 | GSFC | 168.0 | 5.2 | 14.0 | 133.1 | 1.5 | 31.4 | 23.4 |
| 2 | Shipping Corporation of India | 102.0 | 6.0 | 9.4 | 53.8 | 0.3 | 10.9 | 24.2 |
| 3 | GNFC | 599.7 | 6.4 | 25.6 | 43.2 | 1.7 | 9.0 | -5.5 |
| 4 | NMDC | 108.2 | 6.7 | 14.7 | 9.2 | 3.5 | -4.8 | 27.7 |
| 5 | Andhra Sugars | 110.9 | 7.7 | 17.0 | 0.7 | 1.8 | -4.3 | -13.5 |
| 6 | Maharashtra Seamless | 484.1 | 8.5 | 29.3 | 66.9 | 0.5 | 26.0 | 42.6 |
| 7 | Arvind Ltd | 137.3 | 9.9 | 4.4 | 42.9 | 2.7 | 42.2 | 53.8 |
| 8 | Petronet LNG | 231.4 | 10.7 | 19.1 | 5.6 | 2.0 | -1.3 | 2.7 |
| 9 | KRBL | 346.5 | 11.6 | 6.0 | 7.9 | 1.0 | 0.5 | 46.1 |
| 10 | Sandur Manganese | 1,205.0 | 12.0 | 53.2 | 22.5 | 0.4 | -0.7 | 34.4 |
After analysing the data provided in the tables, it is evident that stocks trading at high P/E ratios have demonstrated remarkable performance in the past year. Companies such as Remedium Lifecare, Servotech Power Systems, and Spectrum Electrical Industries have delivered impressive multi-bagger returns of approximately 2800%, 1070%, and 1375%, respectively over the course of one year.
On the other hand, stocks trading at low P/E ratios have provided modest returns to their investors over the past year, as well as in the last three months. In fact, some of these companies have generated negative returns. For example, GNFC has shown negative returns of 5.5% in the last year, and three companies namely NMDFC, Andhra Sugars, and Petronet LNG—have experienced negative returns in the past three months.
Additionally, it is worth noting that companies with high P/E ratios generally have significantly lower or no dividend yields compared to stocks trading at low P/E ratios.
It’s crucial to consider both the potential for higher returns and the associated risks when investing in high P/E growth stocks or low P/E undervalued stocks. Investors should assess their risk tolerance and conduct thorough research before making investment decisions.
Disclaimer: This blog is exclusively for educational purposes. The securities quoted are exemplary and are not recommendatory.
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