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Why looking at this ratio is better for wealth creation


Since it is easy to calculate and understood by a large majority among the valuation ratios, PE ratio is one of the most overused and misused ratios. But is this the right matrix to look at ? The answer is no, there is a better option. It is better to use PEG ratio when looking for long term investment. though finding the right ratio is itself a challenge. The PEG ratio is a better option. In simple terms, it makes sense to pay more for a stock whose earnings grow at a faster rate. Now, how much more should be paid would be determined by dividing a company’s PE multiple with its growth ratio. So, Forward PE multiple is divided by the 5-year forecasted growth rate to arrive at the PEG ratio. For our analysis, we have selected only those stocks which have the PEG ratio of less than or equal to 1.3. It is an effective financial metric that throws light on a company’s price with respect to its future earnings growth potential over a specified period.


However, it is worth mentioning that calculating the PEG ratio is a complex process and comes with its own set of challenges. The challenge with PEG ratio is the quality of the earning forecast and given that in an ever changing macro environment , even the best of the forecast for any business can go wrong which may impact other elements which lead to some unexpected changes. However, even with these challenges, it is worth looking at PEG ratio before taking a long term investment decision.


Another problem with PE ratio is that it not only creates a problem in terms of buying based on PE ratio , but even selling stocks just because P/E is high is also something which leads to selling wealth creators early and then regretting or buying them at a point when they are expensive in real terms.


It is extremely important to keep this in mind, given the current market conditions, where corrections may continue for some time and there are stocks which might start looking attractive due to the low PE ratio. But that does mean they are worth buying. Another reason why looking only at PE ratio leads to wrong decisions, by the time PE gets adjusted to newly announced EPS, it is too late. Especially in the case of commodity stocks, PE ratio is probably the last thing to look at.


The data used in screening the following five stocks has been gathered from the latest Refinitiv’s Stock Reports Plus report dated Mar 31, 2023.

About the Companies

Greenply Industries Limited is an interior infrastructure company. The company is primarily involved in manufacturing of plywood and trading of plywood and allied products. The Company's product offerings include plywoods and blockboards, decorative veneers, flush doors, specialty plywood, and polyvinyl chloride (PVC) products. It offers an array of plywoods and blockboards under the brand names of Green, Optima G, Ecotec, Bharosa Ply and Jansathi. It offers a range of decorative veneers under the brand names of Wood Crests, Royal Crown, Kohl Forest, Burma Teak, and Engineered Veneers. The Company also offers various types of flush doors under the brand names of Green, Optima G, and Ecotec. The Company produces specialty plywood for a variety of requirements, ranging from automobiles, railways to construction-specific uses for building structures. The Company markets PVC boards, doors, and plastic sections under the Green Ndure brand.

Read More at https://economictimes.indiatimes.com/markets/stocks/news/why-looking-at-this-ratio-is-better-for-wealth-creation/articleshow/99184319.cms

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