What is PE Ratio (Price to Earnings ratio)

Hello, in this article we will discuss the Price to Earnings ratio, PE ratio, PE Ratio is most commonly used in the valuation of companies’ share price as to whether Companies Share Price is undervalued or overvalued.

PE Ratio

What is PE Ratio

PE Ratio is arrived at by dividing companies Market Price by Earning Per Share.

PE Ratio = Market Price of Stock /Earning Per Share

i.e Market Price of Stock is Rs. 70, Earning Per Share = Rs. 8 per share

PE Ratio will be = 70/8 = 8.75

This means that Companies stock is currently trading at 8.75 times of Current share price.

In the current market scenario, it is seen that companies growing at High Growth rates are seen with High PE.

PE ratio is also known as earnings multiple or price multiple.

How to find Companies Price to Earnings Ratio

Finding Companies PE Ratio is much simpler as a lot is Online Tools are available to track financial Data for listed entities. one such online Tool is Tickertape.

loading widget to trade RELIANCE

From the Above Price Quote of Reliance Industries Limited, you can See Companies PE. at the Time of Writing this post RIL PE is at 33.89 , which means that RIL stock is trading at 33.89 times its Earnings.


How to do Startup Valuation for Startup Companies in India

In this articles we will share the Startup Valuation Method that is mostly used by Venture Capitalist and Angel Investors for valuing Startups.  Startups are valued with different methods and approaches, this all depends on products, users, technology and revenue models. 

Here Investor invests to earn return of their equity and they risk high on startups because early stage startups have no business experience, no established brand of their products and services, No Human Resources, illiquid Investments etc. The Future of Startups are uncertain, so valuing a startup can be little bit tricky.

Here we will discuss startup valuation at pre-revenue stage or revenue generation just commenced and gradually being scaled up.

Minimum Requirements for Startup Valuation and Stake Diversion – Procedure 

Expected Investment by Venture Capitalist or Angel Investor :

For Example are you an startup Founder and have recently get connected with Venture Capitalist or Angel Investor, He wants to I invest Rs. 100 lakhs in your startup, so How much Company Stake are you willing to divert to get Rs. 100 lakh into your business. We will find this out at later stage. 

Expected Profits by Startup Company will earn 

It is Important to know that what products or services startup entity have , how much it will earn in next year. We need to do some maths and got that company will earn profits of Rs. 300 Lakhs on fifth year. 

Expected Return on Equity Investor expects from Startup entity 

There is certain percentage return that Investor expects to earn from its Investment  , say Investor wants to earn 20% return on Investment per year, 25% return on Investment per year. 

The required Future Value of Investment = 100*(1.20) for 5th Year 

if you calculate the Future Value this Comes out at = 248.83 at 20% and 305.18 at 25% 

Valuation of Company at this time

5th Year Net Profit * PE Multiple 

300*8 = 2400 Lakhs 

How much Company Stake to be diverted 

248.83/2400*100 = 10.36% stake

Fastlegal Provides Valuation Services for Startup Entities though IBBI  registered Valuers, Email us your Requirements at support@fastlegal.in