What is the P/E ratio?
The Price-to-Earnings (P/E) ratio is the single most popular way to judge whether a stock is cheaply or expensively priced. It answers a simple question: how many rupees am I paying for every ₹1 of the company's annual profit?
The formula
$$P/E = \frac{\text{Market Price per Share}}{\text{Earnings per Share (EPS)}}$$
For example, if a stock trades at ₹500 and its EPS is ₹25, the P/E is:
₹500 ÷ ₹25 = 20
A P/E of 20 means investors are willing to pay ₹20 today for every ₹1 the company earns in a year.
What is a "good" P/E ratio?
There's no universal magic number - it depends entirely on context:
| P/E range | Often signals |
|---|---|
| Below 15 | Potentially undervalued - or a struggling business |
| 15–25 | Fairly valued for a stable Indian large-cap |
| Above 30 | High growth expectations - or overvaluation |
A fast-growing IT or FMCG company routinely trades at a P/E of 40+, while a mature PSU bank might sit below 10. Comparing an IT stock's P/E to a bank's tells you nothing - you must compare like with like.
Two ways to use P/E correctly
- Against its own history - if a company usually trades at a P/E of 18 but is now at 28, ask why. Has growth accelerated, or is it just hype?
- Against sector peers - a bank at a P/E of 12 when its peers average 18 may be a bargain (or may have a bad loan book).
The limits of P/E - read this before you rely on it
- Loss-making companies have no meaningful P/E (you can't divide by negative or zero earnings).
- One-off gains - a company that sold a building this year shows inflated earnings and a misleadingly low P/E.
- Debt is invisible - two companies with the same P/E can have wildly different debt levels.
- It's backward-looking - trailing P/E uses last year's profit, which may not repeat.
This is why seasoned investors pair P/E with other metrics like ROE, debt-to-equity, and the PEG ratio (P/E adjusted for growth).
The bottom line
The P/E ratio is a brilliant first filter, not a final verdict. Use it to shortlist stocks, then dig into the financial statements and business quality before investing.
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