Airtel ₹11.9 Lakh Cr — Should You Rebalance Your Portfolio?

Investing in a company is a big decision, and it’s important to ensure that the company you’re considering is credible and trustworthy. This blog will guide you through simple steps to check the credibility of a company before you invest your hard-earned money.

1. Understand the Company’s Business Model

Before investing, it’s crucial to understand how the company makes money. Look at what products or services they offer, who their customers are, and how they stand out from their competitors. A clear and sustainable business model is a good sign that the company is reliable.

2. Review Financial Statements

A company’s financial health is a strong indicator of its credibility. Look at the company’s financial statements, including the balance sheet, income statement, and cash flow statement. Focus on the following:

• Revenue Growth: Is the company’s revenue increasing over time?
• Profit Margins: Is the company making a healthy profit?
• Debt Levels: Does the company have manageable debt?

You can find these financial statements on the company’s website, in their annual reports, or on financial news websites.

3. Check the Company’s Credit Rating

Credit rating agencies like CRISIL, ICRA, or CARE provide ratings that reflect the company’s creditworthiness. A higher credit rating indicates that the company is more likely to meet its debt obligations, which is a good sign of financial stability.

4. Research the Management Team

The company’s leadership plays a critical role in its success. Research the background of the CEO and other key executives. Look for:

• Experience: Do they have a strong track record in the industry?
• Reputation: Have they been involved in any scandals or unethical practices?
• Stability: Frequent changes in leadership can be a red flag.

5. Analyze Industry Position

Understanding how the company fits within its industry can give you insights into its potential for long-term success. Consider:

• Market Share: Is the company a leader in its industry?
• Competitive Advantage: Does it have unique strengths that give it an edge over competitors?
• Industry Trends: Is the industry growing, and does the company adapt well to changes?

6. Examine Stock Performance

While past stock performance doesn’t guarantee future results, it can provide useful insights. Look at the company’s stock price trends over time. Has it been stable, or has it been volatile? Consistent performance is generally a positive sign.

7. Read Analyst Reports

Financial analysts often provide detailed reports on companies, including their strengths, weaknesses, and future prospects. Reading these reports can give you a well-rounded view of the company’s credibility and potential.

8. Check for Legal Issues

A company with frequent legal issues or regulatory violations may not be a safe investment. Look up news articles, legal filings, or regulatory actions against the company. A clean legal history is a good indicator of credibility.

9. Look at Customer Reviews

Customer satisfaction can also be a measure of a company’s credibility. Look for reviews and testimonials from customers. A company with positive feedback and a strong reputation for quality and service is more likely to be trustworthy.

10. Assess Dividend History

If the company pays dividends, check its dividend history. Consistent dividend payments, especially during tough economic times, indicate a strong and reliable company.

11. Evaluate Corporate Governance

Good corporate governance practices ensure that a company is run in a fair, transparent, and accountable manner. Look at the company’s board structure, policies on executive compensation, and how they handle shareholder concerns. Companies with strong governance are usually more credible.

12. Check Insider Trading Activity

Insider trading refers to the buying or selling of a company’s stock by people within the company, like executives. Frequent insider selling might indicate that those who know the company best have concerns about its future.

Conclusion

Checking the credibility of a company before investing is essential to avoid potential risks. By following these simple steps—understanding the business model, reviewing financials, researching the management team, and more—you can make smart decisions and invest with confidence. Remember, a credible company is more likely to provide stable returns and long-term growth, making your investment worthwhile.

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पिछले सप्ताह अब तक सोने में लगभग 1.6 प्रतिशत तक की तेज़ी हुई और जनवरी में सोना लगातार दूसरे साप्ताहिक लाभ के लिए तैयार रहा। हालांकि 2022 में इसकी सकारात्मक शुरुआत हुई है, लेकिन यह सोने के लिए एक कठिन वर्ष हो सकता है। क्योकि ज्यादातर प्रमुख केंद्रीय बैंक ब्याज दरे बढ़ाने के लिए तैयार है।

हालांकि कीमती धातुओं के निवेशकों ने अमेरिकी. फेडरल रिजर्व के नीतिगत फैसले को अब तक पचा लिया है जिससे कीमती धातुओं ने लगातार दूसरे सप्ताह भी बढ़त दर्ज की है। निवेशक अब फेड के अगले नीतिगत फैसले का इंतजार कर रहे हैं, जो इस सप्ताह 26 जनवरी को दिया जाएगा। आर्थिक आकड़ो के मोर्चे पर, गुरुवार को जारी अमेरिकी आंकड़ों के मुताबिक पूरे सप्ताह में 286000 प्रारंभिक बेरोजगार दावे दायर किए गए, जो तीन महीने का उच्च स्तर है। जनवरी में फिलाडेल्फिया फेडरल रिजर्व मैन्युफैक्चरिंग इंडेक्स बढ़ कर 23.2 रहा। मौजूदा घरेलू बिक्री घट कर 6.18 मिलियन पर रही। चीन के तिमाही जीडीपी के आंकड़े अनुमान से बेहतर दर्ज किये गए। जापान से जारी आंकड़ों के मुताबिक राष्ट्रीय मुख्य उपभोक्ता मूल्य सूचकांक में साल-दर-साल 0.5 प्रतिशत की वृद्धि हुई है और राष्ट्रीय सीपीआई में दिसंबर में साल-दर-साल 0.8 प्रतिशत की वृद्धि हुई है। ब्रिटैन से जारी हुए  मुद्रास्फीति (सीपीआई) के आकड़ो में भी वृद्धि दर्ज की गई है। कच्चे तेल के भाव में पिछले सप्ताह ₹250 रुपये प्रति बैरल की वृद्धि देखि गई। बढ़ते हुए कच्चे तेल के भाव से एक बार फिर मुद्रास्फीति बढ़ने का डर निवेशकों में रहा जिसके कारण शेयर बाज़ारो में बिकवाली का दबाव बना रहा और कीमती धातुओं में सुरक्षित निवेश की मांग मजबूत हुई है। रूस और यूक्रेन के बीच तनाव और ब्रिटैन में चल रही राजनितिक उठा पटक, कीमती धातुओं को सपोर्ट कर रही है। चीन ने पिछले सप्ताह अपनी एक और पांच साल की लोन प्राइम रेट पर कटौती कर दी और बैंक ऑफ़ चाइना के वाईस गवर्नर ने आगे भी राहत पैकेज देने के संकेत देकर बाजार की उम्मीद को बढ़ाया है। जिससे कीमती धातुओं की चमक बढ़ने लगी है।

तकनिकी विश्लेषण

सोने और चांदी के भाव इस सप्ताह अमेरिकी फ़ेडरल बैंक की बैठक होने से, सीमित दायरे में रह सकते है। सोने को ₹47000 रुपये पर सपोर्ट और ₹47800 रुपये पर प्रतिरोध है। चांदी को ₹63000 रुपये पर सपोर्ट और ₹66000 रुपये पर प्रतिरोध है।

There has been a lot of buzz in the stock market about IPOs as many IPOs came in the year 2021 and gave extraordinary returns to their shareholders.

Also, people take much interest in IPOs as they find them as a major investment product and provide new hopes to the people.

In other words, investors find new investment hope in these IPOs and as a result of this, the IPO of Zomato, which opened on July 14, was subscribed 1.05 times on the first day of its launching.

The retail investors subscribed to the Zomato IPO almost 2.69 times which is a history in itself. If we talk about the non-institutional investors, then they have put in bids of 13 per cent against the reservation which is a difficult thing to forget in the history of SME-IPOs.

Here, an important question often comes to the investor’s mind: How did the listing price of an IPO decide?

Before getting a dig deep into the whole scenario, let's take a sneak peek at the listing price:

What is the Listing Price?

When a private limited company wants to become public for the very first time, it needs to get its stock listed on the major stock exchanges. To complete a process, the company is required to decide the opening price of shares which is known as the listing price.

The launching period of IPO is of three days and post that the investors are allowed to purchase the shares at a given price. Here, the listing comes into place.

Please note that the allocation of shares takes place only after IPO launching.

The IPO listing price is different from the offer price and is decided majorly by the investment bank which is assisting the company during the IPO launching process.

After the successful launching of an IPO on the stock exchange, it becomes available for every shareholder to trade in the stock market.

Now, the shareholders can be actively involved in buying and selling shares in the secondary market.

How Is The IPO Listing Price Determined?

Several factors will impact how the good IPO gets listed on the stock exchange and how does it affect the IPO listing price:

1.Demand

Demand for a share makes a huge impact on the listing price of an IPO. Hence, the IPO price is also affected by the market demand of the company as the higher the demand, the higher will be the listing price.

The demand for the SME-IPO is affected by numerous factors including the potentiality of a company, its expected valuation, growth sector and more.

Let’s understand the listing process with a suitable example:

If the demand for an IPO is higher, then the chance of that IPO getting oversubscribed more, which in turn makes few of many get a chance to subscribe to it. If it is oversubscribed, many investors will get deprived of the IPO allotment process, and hence the demand surge.

The rising demand makes the IPO firm increase its listing price and hence more investors will trade it in the stock market.

Hence, a high demand, low availability of shares can result in great listing prices and hence great listing gains or vice-versa.

2. Growth Prospects of the Company

The listing price of an IPO is also affected by the growth prospects of a company. For instance, a company that wants to launch its IPO often comes with several objectives like paying debts, operational costs, which also plays a major role in the listing prices.

If a company comes with the objectives of growing and expanding its businesses, the majority of the retail investors will look forward to the same.

This will increase the orders, which in turn increase the demand of the IPO which eventually increases its listing price. The company is likely to list at a good price if there are any chances for good growth.

3. Grey Market Premium

A grey market is a place that is considered under regulated but often gets highlighted when it comes to a demand for IPO. It is the extra amount investors pay along with the offer price.

For example: if the offer price of an IPO is Rs 150 and its GMP is Rs 50. This indicated that the investor is willing to pay Rs 200 for the same IPO in the grey market.

4. The OFS (Offer for Sale) Value

An offer to sell an IPO indicates the number of shares that existing investors are willing to dilute in the IPO.

If OFS is more than a fresh issue, it certainly means that there is a reason why current investors no longer want to be part of the company.

This can be a turn-off for some investors. However, this is not always the case. If a company has high growth potential, it can prosper.

However, a large OFS value can adversely affect the list price.

5. Market Sentiments

Retail investors play a crucial role in deciding the IPO listing price. As more retailers are looking for an IPO, it further results in deciding the listing price.

A comparative analysis of the stock market analysts can also affect the market sentiments to a greater extent. If the investors are looking interested in a particular IPO and the market sentiments are positive, it is a good indication.

However, if there is a lack of interest of the retail investors, there are higher chances that the IPO listing price is considered low.

These are various factors that have a significant impact on the listing price of an IPO.

Therefore, always keep these factors in mind if you don't know how to choose an IPO listing time in India.

Conclusion

Good IPO listings are those which can give you attractive profits and also help you to increase the visibility of the company.

As stated above, numerous factors help promoters find the listing price of the company which includes investors’ interest, GMP, company valuation and most importantly the demand and supply of an IPO.

Rating AVOID Issue Offer Issue Opens on Jan 19, 2022Issue Close on Jan 21, 2022Total IPO size (cr) 680.00Fresh issue(cr) NilOffer For Sale (cr) 680.00Price Band (INR) 166-175Market Lot 85Face Value (INR) 10Retail Allocation 35%Listing On NSE, BSE

Objects of the issue

• To carry out an offer for sale.
• To achieve the benefits of listing

Issue Break-up (%) QIB Portion 50NIB Portion 15Retail Portion 35 Shareholding (No. of Shares) Pre Issue 120,392,576Post Issue 120,392,576 Indicative Timetable Finalization of Basis of Allotment 27-01-2022Refunds/Unblocking ASBA Fund 28-01-2022Credit of equity shares to DP A/c 31-01-2022Trading commences 01-02-2022

Incorporated in 2002, AGS Transact Technologies Ltd was one of the largest integrated Omni-channel payment solutions providers in India in terms of providing digital and cash-based solutions to banks and corporate clients, as of March 31, 2021.

The company provide customized products and services comprising ATM and CRM outsourcing, cash management and digital payment solutions including merchant solutions, transaction processing services and mobile wallets.

The company operate its business in three major segments: Payment Solutions;  Banking Automation Solutions; and other Automation Solutions (for customers in the retail, petroleum, and color sectors).

• It is the second-largest company in India in terms of revenue from ATM managed services and also the largest deployer of POS  terminals at petroleum outlets in India.
• It not just serves the Indian market but has also expanded internationally in other Asian countries including Sri Lanka, Cambodia, Singapore,  Indonesia, and the Philippines.
• As of August 31, 2021, it had approximately 50 banking customers,  including ICICI Bank Limited, HDFC Bank Limited and Axis Bank  Limited.
• The company’s colour operations primarily comprise the supply of automatic paint dispensers and related services, and serve customers including Asian Paints Limited, Kansai Nerolac Paints  Limited and Berger Paints India Limited.
• As of August 31, 2021, it had installed a network of  221,066 merchant POS, 17,924 petroleum outlets, 72,000 ATMs and CRMs offering cash management services, 46,800 cash billing terminals, and installed 88,521 colour dispensing machines.

The business serves customers in 2200 cities and towns through  446,000 machines or customer touchpoints.

Outlook & Valuation:

The company's revenue has been flat over the last three years, mostly on the declining side where revenue in FY21  fell to Rs 1,797 cr from Rs 1,833 cr in FY20.

The company's profit, on the other hand, has been decreasing. The company's profit fell from Rs  83 cr in FY20 to Rs 54.7 cr in FY21.

The company's margin also shrank.  The company is one of India's leading Omni-channel payment solution providers with a strong network.

However, the government's focus on digital payments will further decrease the use and availability of cash can have an adverse effect on business activities.

The IPO is priced at a  PE of 38x and P/BV of 3.71x on the NAV of Rs 47.11, which is slightly higher than its listed peers however, they are not comparable on an apple-to-apple basis, also the IPO is purely OFS based. Thus we assign an "AVOID" rating to the IPO.

IPO Note

AGS TRANSACT TECHNOLOGIES LTD

KEY MANAGERIAL PERSONNEL

Mr Ravi B. Goyal is the Chairman and Managing Director of the Company.

He is responsible for the management of the overall operations of the company and its subsidiaries. He has approximately 26 years of experience in the field of technology.

• Mr Stanley Johnson P is an Executive Director on the Board of the Company. He has been instrumental in strengthening and expanding the company’s banking outsourcing operations across India.
• Mr Vinayak R. Goyal is an Executive Director on the Board of the Company. He works closely with management to drive strategic and business initiatives for the Company.
• Mr SaurabhLal is the Chief Financial Officer of the Company and of its Subsidiary, SVIL. He has over 15 years of experience in the financial service industry.
• Mrs Sneha Kadam is the Company Secretary and Compliance Officer of the Company and its Subsidiary,  SVIL. She is an associate member of the Institute of Company Secretaries of India. She has over eight years of experience as a company secretary in Indian companies.
• Mr Ricardos El Khoury is the Chief Executive Officer and a director of its Subsidiary, Novus SGP. He has approximately 28 years of experience in the information technology sector.
• Mr Mehernosh Parekh is the Chief Operating Officer and a Director of its Subsidiary, SVIL. He holds a Bachelor of Commerce degree from theUniversity of Bombay. He has work experience in the cash management industry.

COMPETITIVE STRENGTHS

• An integrated omnichannel payment and cash solutions provider.
• Customer Driven Portfolio with Strong Capabilities to Develop Customized Solutions In-house.
• Diversified Product Portfolio, Customer Base, and Revenue Streams Leading to Cross-Selling Opportunities.
• Long-Standing Relationships with Technology Providers and Customers.
• Dedicated In-house Infrastructure and Technological Capabilities.
• Experienced Board of Directors and Senior Management.

KEY STRATEGIES

• Focus on Growing of Digital Payment Solutions Business.
• Focus on Enhancing the Integrated Technology Payments Platform.
• Focus on Cash Management Services and international expansion.

KEY CONCERNS

• Covid -19 epidemic has had and may continue to have some adverse effects on their business.
• A small number of clients account for a large amount of their revenue.
• A decrease in the use of cash as a mode of payment could have an adverse effect on its business.
• Engaged in fee-based activities and their financial performance may be adversely affected by an inability to generate income from such activities.
• The RBI and other government authorities heavily regulate the sectors in which they operate.

IPO Note

AGS TRANSACT TECHNOLOGIES LTD

COMPARISON WITH LISTED INDUSTRY PEERS(AS OF 31st MARCH 2021)

There are no listed companies in India whose business portfolio is comparable with that of the company’s business and comparable to the scale of operations. Hence, it is not possible to provide an industry comparison.

FINANCIALS (RESTATED CONSOLIDATED)

Particulars (Rs. In Millions) FY 2021 FY 2020 FY 2019Equity Share Capital 1,185.81 1,185.81 1,185.81Other Equity 4,400.81 3,803.74 3,063.53Net Worth 5,586.62 4,989.55 4,249.34Gross Debt 16,223.41 11,590.17 11,053.03Revenue from Operations 17,589.44 18,004.43 18,057.42EBITDA 4,767.60 4,954.61 4,428.75Profit Before Tax 824.27 1,195.24 788.89Net Profit for the year 547.92 830.14 661.94

DISCLAIMER

The information contained herein is strictly confidential and are meant solely for the information of the recipient and shall not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written permission of Swastika Investmart Ltd. (“SIL”).

The contents of this document are for information purposes only.

This document is not investment advice and must not alone be taken as the basis for an investment decision.

Before taking any decision to invest, the recipient of this document must read carefully the Red Herring Prospectus (“RHP”) issued to know the details of SME-IPO and various risks and uncertainties associated with the investment in the IPO of the  Company.

All recipients of this document must before acting on the given information/details, make their own investigation and apply independent judgment based on their specific investment objectives and financial position.

They can also seek appropriate professional advice from their own legal and tax consultants, advisors, etc. to understand the risks and investment considerations arising from such investment.

The investor should possess appropriate resources to analyze such investment and the suitability of such investment to such investor’s particular circumstances before making any decisions on the investment. The Investor shall be solely responsible for any action taken based on this document.

SIL shall not be liable for any direct or indirect losses arising from the use of the information contained in this document and accept no responsibility for statements made otherwise issued or any other source of information received by the investor and the investor would be doing so at his/her/its own risk.

The information contained in this document should not be construed as a forecast promise guarantee or assurance of any kind.

The investors are not being offered any assurance or guaranteed or fixed returns on their investments. The users of this document must bear in mind that past performance if any, are not indicative of future results. The actual returns on investment may be materially different from the past.

Investments in Securities market products and instruments included in the IPO of the Company are highly risky and they are generally not an appropriate avenue for someone with limited resources/ limited investment and low-risk tolerance.

Such investments are subject to market risks including, without limitation, price, volatility liquidity and capital risks. Therefore, the users of this document must carefully consider all the information given in the RHP including the risks factors before making any investment in the Equity Shares of the Company.

Swastika Investmart Ltd or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with the preparation of the stock market research report.

Accordingly, neither Swastika Investmart Ltd nor Research Analysts have any material conflict of interest at the time of publication of this report.

The compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

Swastika Investment Ltd may have issued other reports that are inconsistent with and reach different conclusions from the information presented in this report.

The research entity has not been engaged in the market-making activity for the subject company.

The research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the Subject Company or third party in connection with the Research Report.

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When a company makes net profits, a portion of the net profits is paid out to the shareholders in dividends.

This is usually referred to as paying some or all of your profits back to shareholders.

Paying out dividends to shareholders of a company will normally receive a portion of those dividends as cash income.

Ploughing back profits is the opposite of paying out dividends. When a company makes net profits, a portion of the net profits is paid out to the shareholders in dividends.

On the other hand, ploughing back profits involves investing its money into its operations rather than distributing it to the shareholders.

Example of Plough Back Ratio of X Ltd and Y Ltd

X Ltd Amount Y Ltd Amount Total Equity Rs.10,00,00,000Total EquityRs.10,00,00,000Net Profits 2017-18Rs.3,30,00,000Net Profits 2017-18Rs.3,30,00,000Dividend PaidRs.66,00,000Dividend PaidRs.33,00,000Dividend Ratio20%Dividend Ratio10%Plough Back Ratio80%Plough Back Ratio90%Market CapitalizationRs.52.80 Crore Market CapitalizationRs.85.80 Crore P/E Ratio16XP/E Ratio26X

In the above example, we can see that both companies X and Y have the same equity base, and we considered that they earned the same profit in the last financial year 2020-2021.

This means both X and Y have the same return on Equity (ROE).

Return on Equity(ROE) = Net Profit of Business / Total Equity of Business.

ROE of X = 3.30 Cr(Net Profit) / 10 Cr(Total Equity) = 33%

ROE of Y = 3.30 Cr(Net Profit) / 10 Cr(Total Equity) = 33%

We have seen both X and Y companies have the same ROE and similar net profits.

But they both differ in the way they pay out dividends.

For example, X pays out 20% of its profits as dividends and ploughs back 80% of profits. On the other hand, we see Y pays out just 10% of its profits as dividends and ploughs back 90% of its profits into its reserves.

What is significant is that X quotes at a P/E ratio of 16X while Y quotes at a P/E Ratio of 26X.

Why is there such a vast difference?

Because Y invests more profits to buy assets and grow as a company and make profit accordingly rather than giving money to shareholders.

To know more about investment in high dividend-paying companies - click here

Why Don't Many Traders Reward High Dividend Paying Companies?

Both companies have the same ROE in the above example, but the Y’s P/E ratio is much higher than X.

Why is it so? Some people like it if the company pays a high dividend, but many don't like dividend-paying companies.

The reason behind that is that when a company gives a high percentage of dividend to shareholders as X did, traders stop investing in that stock because they think that the company should invest the profit into their growth rather than giving high dividend shareholders.

Company Y gives only 10% of its shareholders and invests more of its profit into their growth. That's the reason the Y P/E ratio is 26X

Some people like that they should get the bonus money from the company, i.e., dividend, but these people are very less. The majority of long-term investors don't like dividend-paying companies.

So, Which Company Should you Invest in, X or Y?

X pays out 20% dividends compared to Y's 10% payout. Hence, if you are looking for dividend income, you would prefer investing in X.

But suppose you are a long-term investor who is willing to remain invested for at least ten years and does not mind volatility in the stock price.

Then you would prefer investing in Y because Y invests 90% of profits back into the business, and hence Y will have much more money to grow at a faster rate than X. Thus, your long-term expected return from Y is higher than that of X.

Advantage of Plough back Profits for Traders

Plough back profits is a term used in the corporate world. The number of net profits (or net profit available to shareholders) that a company reinvests back into the business, rather than paying out as dividends.

The reinvestment back into the business is generally done in two ways:

1) Increasing working capital by buying additional inventory and raw materials, paying off debt, and increasing short-term investments.

2) Investing in long-term assets such as new facilities, machinery, and equipment.

The advantage of ploughing back profits into the business, as opposed to paying out dividends to shareholders, is that it allows for the creation of long-term value for the company.

This ultimately helps the share price at some stage in the future.

Conclusion

So the plough back ratio can be beneficial for both short-term traders and long-term traders accordingly. If you are a short-term trader, you should invest in a high dividend-paying company, and if you are a long-term trader, you should invest in a no dividend-paying company or less dividend-paying company.

If you are new to stock trading, you may be wondering what the P/E ratio is. And why it is considered while purchasing stocks. This blog is intended to give you a brief understanding of the P/E ratio.

As a stock market trading investor, you always want to buy undervalued or low P/E ratio stocks.

Trying to understand the reason behind this concept will be helpful to get an idea of what the P/E ratio is and how it works.

As defined, the "Price to Earnings Ratio" or P/E ratio is a valuation indicator that measures the number of money investors pay for each dollar of a corporation's earnings.

It is calculated by dividing the current market price by its earnings per share (EPS).

The P/E ratio can also be stated as "how much an investor pays for one Rupee of earnings".

It gives valuation multiple times higher or lower than the market average. The lower the number, the better the bargain.

So why should you prefer low P/E ratio stocks? To answer this question, we need first to understand how it works.

How does the P/E ratio work?

Low P/E ratio stocks can be considered as blue-chip companies. These are the companies considered to be leaders in their respective fields. They are well established, have a long history and reputation, and have a loyal customer base.

So why should you prefer low P/E ratio stocks?

To answer this question, we need first to understand how it works.

P/E = Price/Earnings Ratio

The P/E ratio is the most commonly used metric for valuing stocks. It's calculated by dividing the market price per share by earnings per share (EPS).

The lower the P/E ratio, the better it is for investors because it means you get more earnings per Rupee spent.

For example, if a company has a P/E ratio of 10, it means you have paid Rs 10 to buy Rs 1 worth of profits (earnings).

Whereas if a company has a P/E ratio of 20, you will have to pay Rs 20 to buy Rs 1 worth of profit. 20 is higher than 10, and hence the former company offers lower value.

Low P/E Stocks = Low-Risk Investment

Now that we know how the P/E ratio works, let's quickly jump into the factors to invest in Low P/E stocks.

Consideration Factors to Buy Low P/E Ratio Stocks

A low P/E ratio could well be a valuation call; it could be a call on the quality of the business.

It is essential to know the reasons for a low P/E ratio before investing in such companies.

If the company is bad, avoiding such companies would be a smart move.

On the other hand, if it is because the market has doubts regarding the future performance of the company, then you must make an independent analysis based on facts before you decide to avoid them or not.

Another example is of Nifty midcap stocks. If you look at the P/E ratios of the NSE Midcap Index and Nifty Smallcap index, you will find that the NSE Midcap index has consistently traded at a lower P/E ratio than the small caps.

The reason for this is straightforward – it is because investors perceive that midcaps are riskier than small caps.

So, a low P/E ratio can be a warning sign, but the P/E ratio cannot use it in isolation to judge companies.

Before forming an opinion on a company, you need to look at other factors like return on equity, interest coverage ratio, debt levels and more.

(Read more about - Factors to be Considered While Choosing Ideal Stocks )

If not P/E, then what should one look at?

There are things you can look at. You can look at the return on equity, which measures profitability. You can look at book value, which measures assets relative to debt.

You can look at the profit margin, which is how much profit you're making relative to sales. And you can look at growth rates.

Some companies have very high P/E's and are also doing extremely well in profitability, asset turnover, and financial risk.

Those things tend to be overlooked as people focus on the P/E ratio alone.

The best way to figure out what's going on with a company is to go through that exercise of looking at all the different factors and then coming up with an overall assessment.

Now, we don't want to say there's no place for the P/E ratio because it tells you something about how expensive stocks are in general.

Still, it doesn't tell you anything about whether a company is cheap or expensive relative to its history or its competitors or its growth rate or its prospects."

‍Conclusion

Wrapping up, we conclude that you should consider P/E with the combination of factors before buying a Stock, like Return on equity, Asset relative to debt, profit margin etc.