P/E Ratio Explained
Understanding Price-to-Earnings ratio and how to use it for stock valuation.
The Price-to-Earnings (P/E) ratio is one of the most widely used metrics for stock valuation. It tells you how much investors are willing to pay for each rupee of a company's earnings.
What is P/E Ratio?
$$P/E = \frac{\text{Market Price per Share}}{\text{Earnings per Share (EPS)}}$$
For example, if a stock trades at ₹500 and its EPS is ₹25, the P/E ratio is 20x. This means investors are paying ₹20 for every ₹1 of earnings.
Types of P/E Ratio
Trailing P/E (TTM)
Uses the company's actual earnings over the past 12 months. This is the most common form.
Forward P/E
Uses estimated future earnings. More speculative but useful for growth companies.
Shiller P/E (CAPE)
Uses inflation-adjusted earnings over 10 years. Useful for long-term market valuation.
How to Use P/E Ratio
Red Flags
Limitations
P/E ratio alone isn't sufficient. Always consider:
Disclaimer: This is educational content only. Not investment advice. Invest in securities market is subject to market risks.
Disclaimer
Investment in securities market is subject to market risks. Read all related documents carefully before investing. Vaishnavi RA is a SEBI Registered Research Analyst. Past performance is not indicative of future results. This content is for educational purposes only and does not constitute investment advice.