InvestorQ : What are the major factors that impact the P/E ratio of a stock?
Khushi Patel made post

What are the major factors that impact the P/E ratio of a stock?

Answer
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Aditi Sharma answered.
2 years ago


There are quite a few factors that influence the P/E ratio but here are a few key such factors…
Return on equity (ROE) is a key factor influencing the P/E ratio. Normally, companies with higher ROE tend to command better P/E ratios.
Growth is an important determinant of P/E ratio. The market tends to assign higher P/E ratios to companies that are able to sustain higher levels of growth Companies with superior brands tend to attract better valuations. For example, most MNCs in the FMCG space like Britannia, Hindustan Unilever etc enjoy premium valuation due to the hidden value of their brands.
Corporate governance and quality of earnings also matter a lot when it comes to valuations.
For example, in the banking industry, HDFC Bank has commanded a higher valuation (P/E) ratio than other banks as its quality of earnings is estimated to be better. Similarly, in the past, Infosys and TCS would get better valuations compared to Satyam (not exist any longer) due to a better quality of management and corporate governance at Infosys and TCS. All these factors get together to determine the P/E Ratio of a company.