Imagine a company having a share price of $100, and its EPS is negative.
If you compute the PE ratio of this company, you will get a negative multiple, which is meaningless.
If you compute the PE ratio of this company, you will get a negative multiple, which is meaningless.
Now imagine the same company having a share price of $100, but because of efficient cost-saving measures in the year, the company made a marginal profit and reported an EPS of $0.01.
The PE of the company is now 10,000x.
And all of a sudden, the shares seem to have become very expensive.
And all of a sudden, the shares seem to have become very expensive.
It's expensive because the PE is high. Ironically, if the company had made a loss instead of a marginal profit, you would have ignored the PE ratio and looked at other ways to value the company.
Lately, we have seen many posts highlighting the ~1500x PE ratio of Mamaearth to prove that the stock is highly overvalued.
Whether the stock is expensive or cheap is a separate discussion.
Whether the stock is expensive or cheap is a separate discussion.
But the approach to valuing a company based only on the PE is simply an inappropriate shortcut.
#IPO
#mamaearth
#IPO
#mamaearth
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