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19 Mar 2018


Fixed Cost:  The cost component also generates internal risks, if fixed costs are high in the total cost .  During a recession or low demand for a product, the company cannot reduce the fixed costs.  At the same time , in a boom period, it cannot change the fixed factors at a short notice.  Thus a high fixed cost component can be a burden to the firm.  The fixed cost component must always be kept at as reasonable level, so it does not affect the profitability of a company.

P/E Ratio:  Investors prefer to use the price-earnings (P/E) ratio to estimate the value of stocks rather than adopting the discounting models.  Every financial magazine and newspapers publishes, at regular intervals, the price earnings per share.  The P/E ratio models have the following three distinct  advantages over the discounting models. (a)  The P/E ratio indicates price per rupee of share earnings.  This can help investors compare the prices of stocks, which have different earnings per share. (b)  P/E ratios are helpful in analyzing the stocks of the companies that do not pay dividend but have  earnings.  It should not be noted that when there is a loss, the P/E ratio analysis is difficult to use.  (c)  The valuables used in P/E ratio models  are easier to estimate than the variables in the discounting models.

With the P/E ratio models  the investor can only  find the relative positions of the different stocks.  They do   not  indicate what price is appropriate for a particular  stock.  For example, from the P/E ratio , the analyst can state that P/E ratio of TATA Motors at 58.07 (02-08-2012) is higher than Eicher Motors(42.53) and Maruti Suzuki (19.88).

Thanking you,                                                             See you later.

1 comment:

  1. Great and Awesome Post. Your knowledge is nice. Thanks you for sharing this post.

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