Buying at triple digit PE ratio seems very risky, But buying at PE of 20 seems to be safe.
So here I am putting an analysis which will suggest, if a company continues to grow with the same pace as it is growing from last 5 years then how many years will it take to reach PE of 20 assuming price of the stock remains same during these year.
This helps us to understand that these high PE of stocks are justified or not.
Only PE doesn't show the growth rate of last 5 year. If a company growing at 20% every year can not have low PE of 20 like HDFC bank. In the same way company growing at 6% cannot have PE 80-90 like Pidilite.
While buying these shares, we should use these values as the holding period reference. We should have in mind that at least this many years we have to keep the stock in our portfolio.
These share should be growth share, Which should be directly proportional to GDP and inflation.
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