Whether a share with higher PE ratio is good for day trading?

    The basic principle of investing is to buy a stock when it is low (undervalued) and sell the

stock when it is high (overvalued). How we can find a company is overvalued or undervalued?

Well the PE ratio can help which means price to earnings ratio. The price refers to current market

price of the company per share and the earnings here refers to the earnings per share that is how

much profit the company earns per share. For example: A company name ABC corp that

generates 10 lakhs of net profit for a year where it's current stock price is 100 rupees and they are

total of 2 lakhs shares, so let's calculate the PE for this company. P is 100 rupees and E is 10 lakhs

divided by 2 lakhs that is 5 is the profit per share. The PE ratio of this company is 100 divided by 5

that is 20.For the PE ratio of the company that you are investing there are many websites like money

control where they shows the PE value of the company you want to invest. PE values ranges

from 1 to 100 to 1000,based on the PE ratio the company is classified as overvalued or

undervalued.

Higher PE ratio means overvalued. Lower PE doesn't means undervalued. If the stock

is trading at a lower PE ratio means, there must be a strong reason why investors are not

confident in the growth of that company. Remember as a investor, we must not look for cheap

stock. We should look for great stock at a bargain price for investing.

A higher PE ratio means that the buyer has to pay higher value for each rupees the

company earned over the last year. Higher PE implies higher expectations that we can own in the

future general rule state that do not invest in the company with higher PE ratios. But there are

some really good companies with strong fundamentals and authentic promotes background

which have higher PE ratios. Now this higher PE ratios doesn't necessarily make them bad

investment.

Now there are lot of factors which contribute to a higher PE ratio. Some of the factors

are:

1) Consistent growth in earnings

2) Profitability

3) Return on equity

4) External macro economic conditions

1) Consistent growth in earnings:

Investors like to invest in the companies that are consistent in their performance and have a

growth trajectory and earnings that are reliable and sustainable, therefore companies that have

shown consistent growth in earnings are preferred and investors are happy to pay more to get a

share in their earnings.

2) Profitability

While growth is good not all the companies successfully convert the growth into

profits. Hence the market which includes retail investors like as rewards companies who have

shown high efficiency in profitability with a higher PE valuation.

3) Return on equity

Return on equity ( ROE) measures a company's profitability in relation to its share holders

equity. This is the one of the most important financial ratio that investor consider before deciding

to invest in a company. It tells us if a company can efficiently converts it's shareholders equity

into profits and usually the companies with high Roe's ratio and lower debts are given higher PE

ratios.

4) External Macro Economic Conditions:

Macro economic conditions impact the entire market news, policy decisions, external

macro economic situations a this can cause the stock price to rise resulting in a sudden boost to

the PE ratio.

To investing in a company with a higher PE ratio lies less in the current market sentiments

and more in the earning capacity of that company.