Why picking up a stock with only PE ratio in view is a bad idea?
PE Ratio is an ideal tool when comparing between corporates that belong to the same industry (for apple-to-apple comparison).
But, you have to be extra cautious when choosing the stocks that belong to different industries.
Let’s take a case – “Titan and Kalyan Jewelers operate in the Gold-Ornaments industry. Titan being the industry leader commands a PE ratio of 88.53 (https://ticker.finology.in/company/TITAN) while Kalyan Jewelers being a mid-cap company only second to Titan – has a PE ratio of 56.69″.
Kalyan Jewelers have strong regional presence in the south India, while Titan have diversified presence all over India with it’s 559 jewelry stores. Beside Gold Jewelry, Titan with it’s range of “Eyewear and Watches” have wide range of products under it’s shelf. That takes away the product concentration risk, also saves the business from gold prices fluctuation.
Consider the case of the high growth companies with ROE and ROCE more than 15% and 20% respectively, such companies will always command higher PE compared to the companies with low growth potential or those operating in conventional businesses.
Disclaimer – Views are Personal and Author is not a SEBI registered Analyst. This article is for Educational Purposes only, and not any Buy-Sell recommendation.