Experts say high PE is a risk factor
The price earning ratios of 40 companies have increased to above 40 due to the recent price hike of their shares, making the companies’ shares risky for investment, Dhaka Stock Exchange data showed. Under the Bangladesh Securities and Exchange Commission rules, no merchant bank or brokerage house is allowed to issue margin loans to purchase shares of more than 40 PE ratio and shares with negative earning.
As per the investopedia definition, PE ratio is a valuation ratio of a company’s current share price compared to its earnings per share.
For example, if a company is currently trading at Tk 43 a share and earnings over the last 12 months were Tk 1.95 a share, the PE ratio for the stock would be 22.05.
Capital market experts said investors should be careful in making investment on shares with negative earning and PE ratio above 40.
They, however, said that some of the companies might not be that risky considering their business prospect.
Of the 40 companies, shares of 12 companies are trading with an abnormal price-to-earnings ratio, more than 100.
The 12 companies are Monno Jute Stafflers, BD Autocars, Beacon Pharmaceuticals, Samata Leather Complex, Sonali Aansh, Bangladesh Lamps, Savar Refractories, Libra Infusions, Legacy Footwear, Anwar Galvanizing, Monno Ceramic and Desh Garmants.
PE ratios of 28 companies were 40 to 99.
A BSEC senior official said, ‘The commission disallows issuing loans to purchase any share with more than 40 price earning ratio. This is one short of discouraging measure.’
Dhaka University finance department teacher M Baki Khalili said, ‘When an investor considers a company for investment, he/she should take price earning ratio as one of the indicators of the company’s situation at the market.’
There is risk in investing on stocks with high price earning ratio, but it depends on the fundamentals of a company, he said.
When a company is fundamentally strong with good prospect of earning, investment on such stocks may not be risky despite having high PE ratio, he said.
‘On the other hand, investment in companies with poor financial performance and prospect could be risky for investment if the PE ratio is high, he said.
As investors are now confident over the capital market due to the recent stable situation, they are making investment on all short of stocks without considering business prospect, he said.
Former DSE senior vice-president Ahmed Rashid Lali told New Age on Friday that investors must have to be careful in making investment on such stocks which were trading above price earning ratio of 40.
‘At the same time, PE ratio is not that important, whether it is 40 or above, if you make investment on a good prospective company,’ he said.
Besides the 40 companies, the shares of seven other companies listed with the Dhaka Stock Exchange were trading above Tk 40 despite the fact that the companies had incurred losses in the latest interim financial period.
The companies are National Tea Company, CVO Petrochemical Refinery Limited, Apex Footwear, Northern Jute Manufacturing Company, Gemini Sea Food, Jute Spinners and Rahima Food.
Fine Foods, Intech Online, MIDAS Financing, Kay and Que, International Leasing & Financial Services, Shahjalal Islami Bank, Sonargaon Textiles, Meghna Condensed Milk, Imam Button, Alltex Industries, Dulamia Cotton, Shyampur Sugar Mills, Meghna Pet Industries, AIBL 1st Islamic Mutual Fund, ICB Islamic Bank and MBL 1st Mutual Fund were among the other companies which incurred losses in their latest financial period.
The shares of the companies are being traded at the DSE around Tk 4-17.
On the other hand, prices of 80 companies were trading below the price earning ratio of 10.
-With New Age input
