Technicals Stability Returns



Understanding PE (Price-to-Earnings) Ratio

PE Ratio measures the relationship between the company's current stock price and EPS (Earnings Per Share). PE Ratio indicates how many times investors pay money to get 1 rupee of return. It is one of the important parameters to evaluate whether a company's stock price is overvalued or undervalued.

The PE ratio is the most popular and well-known valuation metric used by many investors to analyze whether the stock is overvalued or undervalued. It indicates how much investors are willing to pay for a stock's current price to earn one rupee.

The formula to derive PE Ratio

Price to Earnings (PE) Ratio


Current Price - It is the most recent selling price of stocks. The current price indicates the current value of the stocks, and it is also known as market value.

Earnings Per Share (EPS) - EPS is a measure of the company's profits available for the shareholders on a per share basis and calculated by dividing the Net Income by Weighted Share Outstanding. EPS is found in the company's Income Statement.

Example of PE Ratio: Aurobindo Pharma company's current share price is Rs. 687, and EPS (Earnings Per Share) is 91.05.
The value as per the formula (PE Ratio = Current Price / EPS) is calculated as (687 / 91.05) = 7.55


Key Highlights
The PE ratio is the most popular and well-known valuation metric used by many investors to analyze whether the stock is overvalued or undervalued.

This metric indicates how much investors are paying for the company's stock to earn one rupee.

Investors should consider the point while analyzing that the PE ratio does not always guarantee future results, and the EPS number remains the same while the stock price fluctuates daily.


While looking at the PE ratio, the following points should also take into consideration:
A low pe ratio indicates that the company's stock is undervalued, and a high ratio indicates that the stock is overvalued.

This metric indicates how much investors are paying for the company's stock to earn one rupee.

Before investing in any stock, investors should calculate the right price of the company, whether it is undervalued or overvalued.

Price to Earnings is a commonly used & versatile financial analysis tool. It is helpful to identify value and growth stocks.

Investors should consider the point while analyzing that the PE ratio does not always guarantee future results, and the EPS number remains the same while the stock price fluctuates daily.

The lower P/E ratio is always not good. It can be due to other circumstances.

There are two types of PE Ratio:
Trailing PE - Trailing PE is calculated as the Current Price divided by TTM (Trailing Twelve Months) EPS. This metric is easy to calculate because companies declare the financial results, including EPS, each quarter.

Forward PE - Forward PE uses the current price and forecasted earnings of the next four quarters for calculation


How to use PE Ratio effectively
A low PE ratio is considered good, but you have to check that the stock is genuinely low, or it is due to other factors.

Compare the PE ratio of companies that operate in the same industry. Comparing consumer companies with cyclic companies doesn't make any sense. Cyclic companies' PE ratio is generally lower than Non-cyclic companies. Cyclic companies' are volatile and follow trends in the economy. Non-cyclic or defensive companies like the FMCG industry companies' stocks surpass the market during an economic slowdown.

By doing relative valuation of companies in the same industry will give a better understanding of whether the stock is overvalued or undervalued.

Although PE is the most used and common valuation parameter, we still have to check other fundamental ratios like EPS, Trailing PE, Forward PE, Price to Book Ratio, Price to Sales, Net Margin, Earnings Yield, etc.,


A low PE ratio can be due to:
A company is genuinely undervalued.
The growth of the company is slow or negative.
The company may have a high debt burden.
It can be due to investors losing confidence.
Few people know about the company's stock.

A high PE ratio can be due to:
Many investors have an interest in that stock.
The company is becoming very bullish or growing continuously.
It can be due to future projections.
Striking stock price and fall in earnings.


Range Indicator of PE Ratio

Range Indicator Comments Screener at TSR
Below 12 Strong Bullish Extremely Inexpensive Yes
12 to 15 Bullish Inexpensive Yes
15 to 18 Mild Bullish Reasonably Priced Yes
18 to 21 Neutral Fairly Priced Yes
21 to 24 Mild Bearish Expensive Yes
24 to 27 Bearish Very Expensive Yes
Above 27 Strong Bearish Extremely Expensive Yes


Related PE Screener
Valuation Screener PE 5 To 10 PE 10 To 20 PE 20 To 50