Three Penny Stock Myths

MYTH NO 2: STOCKS TRADING AT LOW P/E ARE UNDER-VALUED

Price to earning ratio (P/E) is one of the most talked about ratios in the market. This is based on the theory that stocks with low P/Es are cheap. However, P/E alone doesn’t tell much about the stock price. P/E multiples may be a quick way to value a stock but one should look at this in correlation with expected growth earnings, the risk factors involved, company’s performance and growth potential. “

This is surely a myth. It is also an indication of uncertain future earning of the stock concerned,” says Birla Sunlife Mutual Fund CEO A Balasubramanian. The idea behind dividing price with earnings is to create a levelplaying field where some kind of comparison can be made between high- and low-priced stocks. Since P/E ratios vary across sectors, with growth stocks consistently trading at higher P/E, one can only compare the P/E ratio of a stock to the average P/E ratio of stocks in that sector.

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