Does P/E ratio helps in determining whether the share of a company is overvalued or undervalued?



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Hello Sir,
the question which I am going to ask you is related to my previous question, the question is that does P/E ratio helps in determining whether the share of a company is overvalued or undervalued,if is it so then how one would come to know that the share of a particular company is over valued or undervalued?
Are there any other ratios which helps in determining the fair price of a share?

3 Answer(s)


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I believe for this purpose P/E may not help. One may calculate the intrinsic value of the shares using DCF and comparing the same with the market price!

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Joseph is right. You can compare the DCF share price with the stock market share price to check out how much the difference is. Then you can compare this differential across other companies in the same industry to check if your company is over valued.

But keep in mind the term "over valued" has different meanings to different people. Clearly the shareholders who bought the stock at its current price don't think it is over valued - cause if they did then they wouldn't have bought it. Most investors thought Facebook was overvalued at a $10 billion valuation. But Fb's current market cap is around $60 billion.

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Binny, could you please illustrate on this line 'Then you can compare this differential across other companies in the same industry to check if your company is over valued.'

Is it like I see, if the market is over/under pricing every company in the industry uniformly, because the market foresees the sector to have a good/bad future?