What does DSE's abnormally high P\E ratio tell us about stocks?

The ceramic sector has the highest P/E (price earnings) ratio among all sectors listed on the bourses, with latest financial results and stock prices taken into consideration.

The P/E ratio, which measures stock price relative to earnings per share (EPS), is abnormally high for most ceramics manufacturers following a decline in profits in the latest quarters.

According to the Dhaka Stock Exchange (DSE), the sector comprising five companies had a P/E ratio of 121.76 last week whereas the banking sector's P/E ratio was 6.31.

"This is a mismatch between the financials of the ceramics companies and what investors are willing to pay for the shares," said Md. Ashequr Rahman, managing director of Midway Securities.

A high P/E ratio could mean that a company's stock is overvalued or that investors expect high growth rates in the coming years.

The DSE's overall P/E ratio was 11.28 last week. So, the P/E ratio of the ceramics sector is irrationally high; the problem lies with the performance of the companies.

Of the listed ceramics manufacturers, Fu-Wang Ceramic Industries, Monno Ceramic Industries and RAK Ceramics (Bangladesh) show high P/E ratio based on latest interim financial results.

Mr Rahman said an unexpectedly high P/E ratio could be an exception, but if a sector showed high P/E ratio, then most companies of that sector possessed irrational ratios.

Of the five companies, RAK Ceramics (Bangladesh) had a P/E ratio of 20.35 based on its financial performance for the calendar year 2023. But the multinational company experienced a loss of Tk 0.02 per share for April-June (Q2) this year, taking the P/E ratio to 162.78 in the negative.

The company endured losses as its sales plummeted by 16.48 per cent in the Q2 due to a reduction in market demand and its inability to supply goods that are in demand to customers due to production interruption for low gas pressure or inadequate gas supply.

The P/E ratio of Shinepukur Ceramics has also shown a significant diversion after the latest interim earnings disclosures.

Of the other sectors, bank stocks' represented the lowest P/E ratio of 6.31. The reason is the low market value of listed banks. Nine out of 38 listed banks presently are being traded at a price below the face value of Tk 10 each share.

Asif Khan, chairman of EDGE Asset Management, said another reason behind the lowest sectoral P/E ratio of banks was that the financials of many of the companies were inflated.

The P/E ratios of paper & printing, mutual funds, and miscellaneous sectors are between 20 and 28.

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