As at 6th Jan 2012, our local market is valued at a P/E (Price per earning) of about 14.8x on 2012 earnings. In the other words, it is currently lower than the 10-year average P/E ratio of 16.7x. So, it would be good opportunity for investor to make own assessment and decision in the present market condition.
P/E ratio is commonly used by stock traders to value a company. It reflects whether a company’s share price is overvalued or undervalued.
PE (Price per earning) = Current share price / EPS
It’s crucial for us to focus on individual stock using the market P/E ratio. It can prevent investor from being traded into a bubble situation which is the riskiest environment for an investor to indulge in.
However, there are 2 very important points to take note when using the P/E ratio as indicators to choose stocks:
i. Compare those companies within the same sector.
ii. Comparing the past year and current year performance for the selected stock to determine the stock potential.