The price-to-earnings (P/E) ratio compares a stock's price with the profit the company earns per share. It is one of the most widely used quick checks of valuation.
The formula
P/E = Share price divided by Earnings per share (EPS). If a stock trades at ₹500 and earns ₹25 per share each year, its P/E is 20. In simple terms, investors are paying ₹20 for every ₹1 of annual profit.
How to interpret it
- High P/E: investors expect strong growth, or the stock may be expensive.
- Low P/E: the stock may be undervalued, or the market may expect trouble ahead.
Compare like with like
A P/E is only meaningful against something: the company's own history, its competitors, or its sector average. IT companies often trade at higher multiples than banks or metal producers, so comparing across sectors can mislead.
Limits of P/E
Earnings can be distorted by one-time gains or accounting choices. Companies with losses have no meaningful P/E. Cyclical businesses can look cheap at peak profits and expensive at the bottom. Debt levels are also ignored.
Use it with other tools
Pair P/E with return on equity, debt-to-equity, revenue growth, and the PEG ratio (P/E divided by growth rate). Valuation is a starting point for research, not a buy or sell signal on its own.