Hi!
In this video we will discuss the impact of corporate actions on the PE ratio of a stock.
But before we dive into that, let us first understand what corporate actions are.
Corporate actions are initiatives that are taken by the board of directors after approval from the company’s shareholders.
There are many types of corporate actions and each can have a significant impact on the price of a share.
This makes it very important for investors to stay updated about all corporate actions and how each affects the share price. It also plays a major role while valuing a company through fundamental analysis.
Some major types of corporate actions are:
– issue of Dividends
– share buybacks
– Offer for sale
– Mergers and Acquisitions
– stock splits
– rights issues and many more.
Since all these can impact the earnings per share and the share price of a stock, it will most definitely also have an impact on the PE ratio of a stock.
This is because EPS and share price are both components to calculate the PE ratio.
Pe ratio is calculated by dividing the share price of a stock with the earnings per share.
So to help you understand better, let’s discuss with the help of an example the impact of a share Buyback on the PE ratio.
Assume a Company, has a net profit of Rs.500 crores and the total number of outstanding shares is 100 crores.
In this case, the EPS would be 500 divided by 100, which would be Rs.5
But the company then does a buyback of 10 crore shares from the markets.
This would reduce the number of outstanding shares from 100 crores to 90 crore shares.
The EPS would then be 500 divided by 90 which would be about Rs.5.55
As the EPS would increase, the effect of this will be on the PE ratio too.
Similarly other corporate actions such as dividends, stock splits all have a major impact on the PE ratio.
So this makes understanding the various types of corporate actions very important before investing in a stock.
Thank you for watching!
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