They are toys alright but it can be qiote useful as well. The only thing is that people dont observe the transformation that is taking place, through the help of such ratios.At St. xavier's, I had a friend who used to do moving average calculation with the fundamental figures. Problem, is we look at figures in a vacuum. And then it doesnt make any sense.

 

Mr. Lalit,

 

100 p.c. agree with you. We have to conyinuously roll over the stones to get a pearl. But once we get once, we should try to hold on to them. Also, I beleive that PE-rating/de-rating is done by markets, something which we as individual investors myst not try to take a gauge of. So, by sticking to a few core principles, and PE-re-rating may be one of them if one is comfortable with it, we can easily locate what we wanted..... what will happen with our picks will be best left to market to determine....

 

Regards,

 

Vivek

 

Let us assume that there are two companies Company L is a low PE co. whereas company H is a high PE company. L trades at a PE of 10 times and grows at 10% whereas H trades at a PE of 25 tiomes and grows at 25%.For sake of simplicity let us assume their base EPS at Rs 10 each in the first year of study:

 

	2007	2008	2009	Absolute Return
Company L
EPS growing at 10%	10	11	12.1
PE = G = 10%	10	10	10
Stock Price	100	110	121	21%
Company H
EPS growing at 25%	10	12.5	15.625
PE = G = 10%	25	25	25
Stock Price	250	312	390	56%

 

 

 

Even with that hypothetical example the second company had not done bad for investors who have held it since inception. Also switching midway from H to L is more a matter of chance rather then choice.

 

Generally I assume these companies are from different sectors. You can assume HDFC bank as a H and any other company as L.