Investment is all about market risk. Investing in stocks require a good analysis of the companies. Mere blindly putting all the money in any company may bring a loss. I incurred huge loss in my starting days, before learning some strategy about company valuation.


Valuation checks are crucial before investing in shares as they help determine a stock's true worth, allowing investors to identify undervalued opportunities and avoid overpaying for assets. It is a critical tool for investors to assess the potential of an investment, avoid costly mistakes, and ultimately achieve their financial goals. ***But how one should check the valuation?***



![1000172559.jpg](https://files.peakd.com/file/peakd-hive/steemflow/48Vj5vpXzwz7DkoBGdE1Ro2Hka6PGoq4YDaqzimuDF7FHuwRoG2paFkhFqveRcMpVv.jpg)
*[src](https://share.google/d9jXwDNZOKrMwm6Z4)*


Over the years, I have realised one simple trick to avoid overpaying for any company. The Starting Point of Valuation Check begins by simply compairing :

**PE** and **RoE** 

It is always advisable to compare its PE with its RoE.

Here’s why:

– ***PE (Price to Earnings) tells you how much you’re paying***

– ***RoE (Return on Equity) tells you how much company is earning on its own money***

The basic rule that supports this valuation check is : 

> **If RoE > PE → valuation is reasonable**
> **If RoE < PE → stock may be expensive**

Take an example to help understand this check. 

– *Company A: PE = 12, RoE = 18 → Reasonable*

– *Company B: PE = 24, RoE = 10 → Risky*


This single check has saved me from several value traps. Because profit can be shown, but return on equity is harder to manipulate.


- **Price to Earnings :**

The Price-to-Earnings (P/E) ratio compares a company's stock price to its earnings per share (EPS), indicating how much investors are willing to pay for each rupee of the company's earnings. A higher P/E ratio generally suggests investors expect higher future earnings growth, while a lower P/E ratio may indicate the opposite or that the stock is undervalued. 


- **Return on Equity:**

The Return on Equity , is a profitability ratio calculated by dividing a company's net income (profit after taxes) by its shareholders' equity, i.e the value of the company owned by its shareholders. A higher ROE generally suggests that a company is more efficient at using shareholder investments to generate profits, while a lower ROE might indicate less efficient use of funds. 





**In good faith - Peace!!**



![1000037470.png](https://files.peakd.com/file/peakd-hive/steemflow/Eo8M1obna2cYnnMAc2ZC3wWMW9ZqZHvk9StEga6aY2cTsKmweW7zFBDm7D13YHVoC5N.png)

Posted Using [INLEO](https://inleo.io/@steemflow/valuation-check-pe-vs-roe--3vb)