Last night, one of my friends (he has graduated from Pharmacy Dept., Dhaka University) argued that most of the stock prices of the Dhaka Stock Exchange are undervalued (as he observed) based on the existing P/E ratio! So there is enough scope to increase the price of the existing shares!
The stock market authority has set the P/E ratio - 40 for providing loans against stocks by the merchant banks (previously it was like 100). This gives a misleading impression to investors that there is still scope for price increase of those stocks that have the P/E ratio less than 40. So they are wrongly and desperately investing in those stocks.
It is the information for all that the P/E ratio of a stock doesn't reflect the strength of that stock. Rather, it is set by the stock market authority in an effort to control the price hiking of the stocks. In other words, setting a specific P/E ratio for loans is one way to control price bubble that the current stock market is experiencing.
The strength of a company's share depends on the strength of the financial position of that company. One has to look after the financial history of a company properly before purchasing that company's share. Price hike of the stock prices should be also coincided with the overall macroeconomic stability of the country. I must say that for the last couple of years, there was nothing happened in the Bangladesh macroeconomy for which the prices of stocks can increase the way it is increasing right now in the stock markets of Bangladesh.