What is P/E Ratio? How interpret and analyse the PE Ratio?

Imagine if you could judge whether a stock is overhyped or a hidden gem—all in one number. That’s the power of the P/E Ratio, or Price-to-Earnings Ratio, one of the most widely used valuation metrics in fundamental analysis.

Whether you're new to investing or brushing up on your skills, understanding the P/E ratio is crucial for smart investment analysis. One can evaluate these metrics in real-time and make informed decisions.

In this guide, we’ll break it down with real Indian stock examples, relatable analogies, and pro tips to help you avoid rookie mistakes.

1 What is P/E Ratio?

P/E Ratio = Current Market Price / Earnings Per Share (EPS)

The P/E ratio simply tells you how much investors are willing to pay today for ₹1 of a company’s earnings.

Real-World Example:

If TCS is trading at ₹3,500 and its EPS (earnings per share) is ₹140:

P/E = ₹3,500 / ₹140 = 25

This means investors are willing to pay ₹25 for every ₹1 TCS earned in the past year.

Think of it like buying a money machine: If a machine earns ₹1 every year, would you pay ₹25 for it? That’s essentially what a P/E ratio measures.

3 : Types of P/E Ratios

Understanding different types of P/E ratios adds depth to your analysis:

Companies with negative earnings, won't show a valid P/E - this is where you need caution.

3: How to Interpret P/E Ratio?

High P/E Ratio Meaning:

• Market expects strong future growth
• OR stock may be overvalued

Low P/E Ratio Stocks:

• Could be undervalued bargains
• Or indicate poor future prospects

Pro Tip: Use Earnings Yield = 1 / P/E

If a company has a P/E of 20, its earnings yield is 5% (1/20). This helps compare it to FD or bond returns.

Higher P/E ≠ Better investment always. It needs context.

4 : When is P/E Ratio Useful?

• Best used to compare companies within the same sector

Example: Infosys vs TCS

• Works well in stable economic environments
• Use with PEG Ratio (P/E to Growth) for deeper insights

PEG = P/E ÷ Expected EPS growth
A PEG < 1 may signal undervaluation

P/E is a relative tool, not an absolute one.

5: When Can P/E Be Misleading?

• Negative or Zero Earnings

Swiggy or startups with no profits = P/E becomes N/A

• Cyclical businesses like steel or auto

Low P/E during upcycles may mislead investors

• Debt-heavy companies

P/E doesn’t reflect financial leverage

• Cash flow ignoring

P/E focuses on accounting profits, not cash generated

Always combine P/E with other indicators like debt ratios or return on equity (RoE).

6 : P/E Ratio Comparison Table (Visual Aid)

Example:

This table helps you compare individual companies vs their sector average. Always ask: Is the stock priced higher or lower than peers? Why?

8 : Final Thoughts: Pros and Cons of P/E Ratio

Pros:

• Simple to calculate and understand
• Great for relative comparisons
• Useful for screening undervalued or overpriced stocks

Cons:

• Misleading during unusual earnings cycles
• Fails with startups or cyclical firms
• Ignores debt levels, cash flows, and other vital indicators

Bottom Line: P/E is a great starting point, not the final word.