Series – I : How to value Nifty with the help of Price to Earning (P/E) Multiplier/ratio.
Firstly, let’s try to understand what is P/E ratio
The Price to Earnings ratio (P/E ratio) is the ratio for valuing a company/index that measures its current traded price relative to its earnings per share (EPS).
PE ratio is also known as “price multiple” or “earnings multiple”.
Formula to calculate P/E multiplier :
P/E Ratio= Market value per share / Earnings per share
Now, How to read and view Nifty P/E?
Nifty PE ratio is important as it is a measure of valuation of all the companies included in Nifty. From long term perspective, low Nifty P/E ratio is considered inexpensive and ideal for going long. A high Nifty PE multiple, on the other hand, is assumed to be expensive and one should be cautious while taking investment decision.
Current Nifty PE ratio is 18.60 as on 01st April, 2020. It means Nifty is 18.60 times its weighted average earning of its 50 shares.
Nifty is considered to be undervalued when Nifty P/E ratio is below 12 and considered to be overvalued when it is near 28.
Summarizing the above in below table :
|Nifty P/E Ratio Range||Valuation|
|Above 28||Very Expensive|
|22 – 28||Expensive|
|16 – 22||Fairly Priced|
|12 – 16||Attractive|
|Below 12||Very Attractive|
Investors should not judge Nifty index or Sensex by its value. Nifty near 8000 & Sensex near 25000 are merely numbers and one needs to take EPS of all the constituent stocks into consideration before making an investment decision. Whether the index is cheap or expensive should be judged on the basis of its PE ratio and other fundamental parameters rather than traded number.
Some past data of Nifty P/E :
Most important point, from where to get this data on regular basis
National Stock Exchange (NSE) publishes historical Price to Earning data in website.
Check the link below :