What is the P/E Ratio (Price-to-Earnings Ratio)
The P/E ratio (Price-to-Earnings Ratio) is a fundamental metric used by investors to evaluate a company’s valuation. It measures how much investors are willing to pay for each rupee (or dollar) of a company’s earnings.
Formula for P/E Ratio
P/E Ratio=Market Price per ShareEarnings per Share (EPS)P/E \, Ratio = \frac{\text{Market Price per Share}}{\text{Earnings per Share (EPS)}}
Where:
- Market Price per Share = Current trading price of the stock.
- EPS (Earnings Per Share) = Net profit of the company divided by the total number of outstanding shares.
Types of P/E Ratio
1. Trailing P/E Ratio
- Based on past earnings (last 12 months).
- More accurate as it uses actual data.
- Example: If a company’s share price is ₹1000 and its past EPS is ₹50, the P/E ratio = 1000 ÷ 50 = 20.
2. Forward P/E Ratio
- Based on projected future earnings.
- Useful for estimating future growth.
- Example: If the estimated future EPS is ₹60, then Forward P/E = 1000 ÷ 60 = 16.67.
Interpreting the P/E Ratio
High P/E Ratio (>25-30)
🔹 Investors expect high growth in the future.
🔹 Stock may be overvalued if earnings don’t increase.
🔹 Common in high-growth sectors like technology, e-commerce.
🔹 Example: TCS, Infosys, Tesla often have high P/E due to strong growth expectations.
Low P/E Ratio (<10-15)
🔹 Stock may be undervalued or facing challenges.
🔹 Indicates less investor confidence in future growth.
🔹 Common in mature or cyclical industries like banking, manufacturing.
🔹 Example: Coal India, ONGC often have lower P/E due to slow growth expectations.
P/E Ratio in Indian Market
| Company | Market Price (₹) | EPS (₹) | P/E Ratio |
|---|---|---|---|
| Reliance Industries | 2,500 | 90 | 27.8 |
| HDFC Bank | 1,600 | 80 | 20.0 |
| TCS | 3,800 | 120 | 31.6 |
| Infosys | 1,600 | 60 | 26.7 |
| ITC | 450 | 20 | 22.5 |
| Coal India | 400 | 50 | 8.0 |
- Reliance & TCS have a high P/E due to strong growth expectations.
- Coal India has a low P/E, meaning it’s either undervalued or facing lower growth prospects.
Limitations of P/E Ratio
⚠️ Does Not Consider Growth – A company with a low P/E may still have poor growth potential.
⚠️ Industry Differences – P/E ratios vary across sectors; comparing IT stocks with banks is misleading.
⚠️ Earnings Manipulation – Companies can adjust earnings, affecting P/E calculations.
⚠️ No Debt Consideration – High debt can affect future earnings but is not reflected in the P/E ratio.
P/E Ratio vs Other Valuation Metrics
| Metric | What It Measures | Best Used For |
|---|---|---|
| P/E Ratio | Price relative to earnings | Comparing profitability |
| P/B Ratio | Price relative to book value | Asset-heavy industries (banks, real estate) |
| PEG Ratio | P/E adjusted for growth | Growth stocks |
| EV/EBITDA | Enterprise Value to EBITDA | Companies with high debt |
: When to Use the P/E Ratio?
✅ Compare stocks in the same sector (e.g., HDFC Bank vs. ICICI Bank).
✅ Find undervalued stocks with strong earnings potential.
✅ Avoid overvalued stocks with extremely high P/E ratios unless justified by high growth.
✅ Combine with other metrics like PEG ratio, P/B ratio, and ROE for better analysis.
Would you like a detailed stock analysis based on the P/E ratio? 🚀📊
