From the Viewsroom

What’s the true P/E ratio?

PALAK SHAH | Updated on November 04, 2018

To get that, firms should start reporting consolidated numbers

Price to earnings (P/E) ratio is one of the key parameters used to determine valuation of a listed company or key index. But with many companies reporting only standalone numbers, the current P/E factor could be far from the actual ratio.

For example, Nifty’s current P/E as per NSE is around 24 but leading analysts believe it could be much lower after recent stock market crash. Out of 50 stocks in Nifty 50, consolidated financial results in quarterly financials is reported by 31 companies only. There is sharp difference in standalone and consolidated earnings per share (EPS) of some Nifty 50 companies.

“PE ratios at NSE indices are computed taking into account trailing four quarter financials as reported by companies. We are using standalone financials since all companies do not provide consolidated financials on quarterly basis as it is not mandatory. As on August 31, 2018, out of 50 stocks in Nifty 50, consolidated financial results in quarterly financials is reported by 31 companies only,” an NSE spokesperson said.

Experts say that calculation method adopted by the exchange may not give an accurate picture and P/E looks elevated especially when frontline stocks have eroded in value by up to 50 per cent from peak this year. Financial market data vendor Bloomberg gives out current Nifty current P/E at 20.

“Historically, the difference between the standalone and consolidated EPS has been about 25 per cent. Therefore, if one takes standalone profits, Nifty P/E in current scenario may look highly inflated,” a research head at leading Mumbai brokerage house told Business Line.

The exchange cannot be blamed for its method and rather, it is the reporting structure for companies specified by SEBI that seems flawed. It is not mandatory for companies to report consolidated financial numbers at the end of every quarter.

Published on November 04, 2018

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