P/E Ratio (Price-to-Earnings Ratio) measures how much investors pay for each unit of a company’s earnings. It’s calculated by dividing the stock price by earnings per share. A P/E of 20 means investors pay ₹20 for every ₹1 of annual profit. It’s the most widely used valuation metric, helping traders quickly assess if a stock is expensive or cheap relative to its earnings.
- Shows how much you pay per rupee of company earnings
- Lower P/E may indicate value; higher P/E may indicate growth expectations
- Always compare P/E within the same industry
How P/E Ratio Works
The formula reveals what you’re paying for earnings:
P/E Ratio = Stock Price ÷ Earnings Per Share
Example:
Stock Price: ₹1,200
EPS (TTM): ₹60
P/E = 1,200 ÷ 60 = 20
Interpretation:
You pay ₹20 for every ₹1 of annual profit
At current earnings, it takes 20 years to "earn back" your investment
Quick Reference: P/E Interpretation
| P/E Range | Typical Meaning | Common In |
|---|---|---|
| < 10 | Potentially undervalued | Cyclical, troubled companies |
| 10-15 | Moderate/value | Mature, stable industries |
| 15-25 | Fair value | Most established companies |
| 25-50 | Growth premium | Technology, high-growth sectors |
| > 50 | High expectations | Disruptors, hypergrowth |
Example: Comparing P/E Ratios
Two IT Companies:
| Metric | Infosys | TCS |
|---|---|---|
| Stock Price | ₹1,500 | ₹3,600 |
| EPS | ₹60 | ₹120 |
| P/E Ratio | 25 | 30 |
Analysis:
- TCS trades at higher P/E (30 vs 25)
- Investors pay more per rupee of TCS earnings
- Could indicate: higher growth expectations, better quality, or overvaluation
- Neither is “cheaper”—₹1,500 vs ₹3,600 price is irrelevant without considering earnings
P/E ratio shows how much you pay for each rupee of company earnings. Calculate it by dividing stock price by earnings per share. Compare P/E within industries, not across sectors. Lower isn’t always better—it depends on growth expectations.
Types of P/E Ratio
Trailing P/E (TTM)
Uses past 12 months’ actual earnings. Factual but backward-looking.
Forward P/E
Uses estimated future earnings. More relevant but relies on analyst guesses.
Shiller P/E (CAPE)
Uses 10-year average inflation-adjusted earnings. Smooths out cycles for market valuation.
Common Mistakes
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Comparing across industries – Tech at 30 P/E isn’t expensive if industry average is 35. Banks at 15 P/E isn’t cheap if peers trade at 10.
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Ignoring negative earnings – P/E is meaningless for loss-making companies. Use Price/Sales or Price/Book instead.
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Assuming low P/E = good buy – Low P/E often reflects real problems. Investigate why it’s low.
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Using P/E alone – P/E ignores debt, growth rate, and cash flow. Use multiple metrics together.
How JournalPlus Tracks Fundamentals
JournalPlus lets you log the P/E ratio and other fundamentals when entering trades, helping you review whether valuation influenced your decisions and outcomes.
