Investing in the stock market? If you are reading this post it means you are curious to know from where o start investing. Well , you are landed to right post. Just go through it and at the end you will be leaerned how to find gems in market. In this post , we will learn the two ratio which is PE(Price to earnings) and PS(Price to sales). But do you really know how they work? Let me explain in a very simple way with practical examples.
What is PE Ratio?
PE ratio tells us how much an investor is paying for every Rs 1 profit of a company.
Formula:
PE Ratio = Stock Price / Earnings Per Share (EPS)
If a company has a PE ratio of 20, it means investors are ready to pay Rs20 for every Rs1 profit the company earns.
Why is PE Ratio Important?
- It helps to find out if a stock is undervalued or overvalued.
- It is a better metric than sales because earnings (profit) matter more than revenue.
- It is useful for comparing companies of different sizes.
High PE Doesn’t Always Mean Overvalued
A high PE ratio does not always mean a stock is overvalued. Sometimes, investors are bullish about future growth and expect higher earnings in the coming years.
For example:
- Avenue Supermarts (DMart) has a high PE ratio, but investors believe in its strong growth potential, so they are willing to pay a premium.
Negative PE Doesn’t Mean Undervalued
A negative PE ratio means the company is making losses, not that it is undervalued. If a company keeps losing money, it may never become profitable.
For example:
- Vodafone Idea has a negative PE because it is making losses, and there is uncertainty about future profitability.
- Zomato had a negative PE during its early years because it was not making profits, but investors still invested for long-term growth.
What is PS Ratio?
PS ratio tells us how much an investor is paying for every Rs1 sales of a company.
Formula:
PS Ratio = Stock Price / Sales Per Share
If a company has a PS ratio of 5, it means investors are paying Rs 5 for every Rs 1 revenue of the company.
When to Use PS Ratio?
- When a company is new or a startup with no profits yet.
- When a company is in the growth phase and reinvesting everything, leading to zero or negative profits.
- When comparing companies in industries where profit margins vary a lot.
Why PE Ratio is More Accurate?
PE ratio is more reliable because it considers actual profits. Sales can be high, but if a company is not making profit, it doesn’t matter.
For example, two companies:
| Company | Revenue ( Cr) | Net Profit ( Cr) | PE Ratio | PS Ratio |
|---|---|---|---|---|
| Big Company A | 10,000 | 1,000 | 15 | 3 |
| Small Company B | 1,000 | 200 | 10 | 2 |
Analysis:
- PE Ratio: Small Company B has a lower PE Ratio (10 vs 15), meaning it is cheaper based on profit.
- PS Ratio: Both have a similar PS Ratio (3 vs 2), so based on sales, they are almost similar.
- Conclusion: Even though Company A is bigger, Company B is undervalued based on PE ratio because its profit is better compared to its stock price.
When PE Ratio Fails and PS Ratio Helps
Let’s say a startup company makes Rs 500 Cr revenue but has zero or negative profit. If we use PE Ratio, it won’t work because earnings are negative. But PS ratio will still show valuation based on sales
For example:
| Company | Revenue ( Cr) | Net Profit ( Cr) | PE Ratio | PS Ratio |
|---|---|---|---|---|
| Startup X | 500 | -50 | NA (negative) | 5 |
Since PE Ratio is not useful here, we look at PS Ratio to understand valuation. If this startup starts making profits in the future, its PE Ratio will become relevant.
How to Identify Undervalued and Overvalued Stocks?
- Low PE Ratio (compared to industry average) → Undervalued (Good Buy)
- High PE Ratio (compared to industry average)*→ Overvalued (Expensive, unless growth is high)
- Low PS Ratio (for a new company) → Undervalued (Potential Growth)
- High PS Ratio (for a new company) → Overvalued (Risky)
Look Beyond PE and PS Ratios
PE and PS ratios alone are not enough to decide if a stock is good or bad. Always check:
- Revenue and profit growth
- Debt levels
- Company’s future plans
- Industry trends
For example:
- Reliance Industries has a high PE, but its growth in Jio and retail justifies it.
- ITC had a low PE for a long time, but investors avoided it due to slow growth in FMCG.
Undervalued vs Overvalued Housing Finance Stocks – A Practical Analysis!
Investors often struggle to identify whether a stock is undervalued or overvalued. Simply looking at the P/E ratio isn’t enough! In this analysis, we break down key financial metrics like EPS, debt, profitability, and growth trends to help you make an informed decision.
| S.No | Name | CMP ₹ | P/E | EPS ₹ | ROE % | Debt ₹Cr | Sales ₹Cr | Debt/Equity | Sales 5Y Growth % | Profit 5Y Growth % | Debt/Profit | Days Receivable | CMP/Sales |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1 | Bajaj Housing | 115.33 | 49.08 | 2.50 | 15.23 | 74,474 | 9,064 | 3.96 | - | 43.02 | 0.64 | 10.60 | - |
| 2 | HUDCO | 178.88 | 13.36 | 13.40 | 13.17 | 93,565 | 9,531 | 5.46 | 6.99 | 12.34 | 44.20 | 0.06 | 3.76 |
| 3 | LIC Housing Fin. | 528.45 | 5.64 | 93.64 | 16.22 | 2,57,685 | 27,752 | 7.67 | 9.41 | 14.35 | 54.14 | 0.13 | 1.05 |
| 4 | PNB Housing | 786.80 | 11.22 | 70.27 | 11.80 | 55,016 | 7,403 | 3.68 | -1.28 | 7.15 | 36.02 | 2.71 | 2.77 |
| 5 | Aadhar Housing | 426.90 | 21.14 | 20.65 | 18.41 | 14,609 | 2,966 | 2.49 | 15.37 | 34.28 | 19.49 | 2.76 | 6.19 |
| 6 | Aptus Value Hou. | 304.80 | 21.46 | 14.18 | 17.22 | 6,196 | 1,640 | 1.54 | 33.24 | 40.52 | 10.13 | 0.00 | 9.26 |
| 7 | AAVAS Financiers | 1752.35 | 24.63 | 71.14 | 13.93 | 12,479 | 2,264 | 3.08 | 23.23 | 22.76 | 25.43 | 2.21 | 6.13 |
1. Valuation Analysis (P/E, CMP/Sales & EPS)
- LIC Housing Finance has the lowest P/E (5.64) and highest EPS (₹93.64)—this indicates it is undervalued based on earnings.
- HUDCO (P/E 13.36, EPS ₹13.40) and PNB Housing (P/E 11.22, EPS ₹70.27) are also reasonably valued.
- Bajaj Housing (P/E 49.08, EPS ₹2.50) and AAVAS Financiers (P/E 24.63, EPS ₹71.14) are expensive. Their high P/E suggests strong growth expectations, but whether it’s justified depends on future growth.
- CMP/Sales Ratio:
- LIC Housing (1.05) and HUDCO (3.76) are the cheapest relative to revenue.
- Bajaj Housing (10.60) and Aptus Value Housing (9.26) are the most expensive.
📌 Stocks with low P/E & high EPS are likely undervalued, while those with high P/E should justify it with strong growth potential.
2. Growth & Profitability Analysis (Sales & Profit Trends)
- Highest 5-Year Sales Growth:
- Aptus Value Housing (33.24%) and AAVAS Financiers (23.23%) have the best revenue growth.
- PNB Housing (-1.28%) is the only one with declining sales—this is a red flag.
- Highest 5-Year Profit Growth:
- Aptus Value Housing (40.52%) and Aadhar Housing Finance (34.28%) show strong profitability expansion.
- PNB Housing (7.15%) and HUDCO (12.34%) have the weakest profit growth.
High P/E stocks like Aptus & AAVAS have strong growth backing them, while low P/E stocks like LIC Housing are undervalued but growing slower.
3. Debt & Financial Risk (Debt-to-Equity, Debt-to-Profit, Days Receivable)
- LIC Housing Finance has the highest debt (₹2,57,685 Cr) but also the highest sales (₹27,752 Cr), making it manageable.
- HUDCO has the highest Debt-to-Equity (5.46)—this is risky if interest rates rise.
- Aptus Value Housing has the lowest Debt-to-Equity (1.54), making it financially stable.
- Debt-to-Profit Ratio:
- Bajaj Housing (43.02) and HUDCO (44.20) have high debt relative to profits—this means more earnings go toward interest payments.
- Aptus Value (10.13) and Aadhar Housing (19.49) have lower debt-to-profit, meaning they can use earnings more effectively for growth.
Low debt-to-equity stocks like Aptus & Aadhar Housing are financially safer, while LIC Housing has high debt but strong earnings to support it.
4. Operational Efficiency (ROE & Days Receivable)
- Aadhar Housing Finance has the highest ROE (18.41%)—it is the most efficient in generating returns.
- LIC Housing Finance (ROE 16.22%) is another strong performer.
- PNB Housing (11.80%) and HUDCO (13.17%) have weaker ROE, meaning they use capital less efficiently.
- Days Receivable:
- Bajaj Housing (43.02 days) and HUDCO (44.20 days) take longer to collect payments, affecting cash flow.
- Aptus Value Housing (0 days) is the best in terms of fast payment collection.
📌 High ROE stocks like Aadhar & LIC Housing generate better shareholder returns, while low days receivable means better cash flow management.
5. Promoter Holding & Ownership Confidence
- Bajaj Housing (88.75%) and Aadhar Housing (75.74%) have the highest promoter holding, which is a positive sign.
- PNB Housing (28.11%) and AAVAS Financiers (26.47%) have the lowest promoter holding, meaning more institutional/public ownership—this can increase stock volatility.
Final Thoughts
- If the company is profitable, use PE Ratio.
- If the company has no profit yet, use PS Ratio.
- Always compare PE and PS ratios within the same industry.
- No single ratio is perfect; always look at multiple factors before investing.
By understanding these ratios, you can find hidden gems in the stock market and avoid overpaying for overhyped stocks!
