P/E Ratio

The Price-to-Earnings Ratio, or P/E Ratio, is a valuation measure that compares a company’s current share price with its earnings per share (EPS).

It is calculated as:

P/E Ratio = Market Price per Share ÷ Earnings per Share

For example, if a company’s share price is ₹600 and its EPS is ₹30, its P/E ratio is 20.

This means investors are currently paying ₹20 for every ₹1 of annual earnings represented by each share.

A higher P/E may suggest that investors expect stronger future growth, but it can also indicate that the stock is expensive relative to its current earnings.

A lower P/E may indicate a cheaper valuation, but it can also reflect weak growth expectations or business problems.

P/E ratios are most useful when comparing:

• Similar companies in the same industry
• A company with its own historical valuation
• A company with an appropriate market or sector benchmark

The ratio should not be used alone. Earnings quality, growth, debt, business strength, and future prospects also matter.

Companies with losses may not have a meaningful P/E because their earnings are negative.

Comparing Two Similar Companies

Company A trades at ₹500 with an EPS of ₹25, giving it a P/E ratio of 20.

Company B trades at ₹600 with an EPS of ₹20, giving it a P/E ratio of 30.

At first glance, Company A appears cheaper relative to its earnings.

However, Company B may be growing profits much faster and may therefore deserve a higher valuation.

An investor studies both companies before deciding whether either is attractive.

This shows why the P/E ratio helps compare price with earnings, but does not by itself tell investors whether a stock is cheap or expensive.