PE Ratio – Price to Earnings Ratio | Formula & Examples

The Price-to-Earnings (P/E) ratio is a primary tool for stock market investors when valuing stocks using valuation multiples, as it quickly signals whether a stock is valued expensively or cheaply in relation to its current earnings. Understanding what is PE ratio in share market will help you make a better investment decision, especially if you are new to the share market. This article will take you through everything you need to consider about the price earnings ratio - what it is, how to calculate PE ratio, the important formulas, real examples, the context of the Indian market (such as Nifty PE ratio), and the most frequently asked questions.

What Is the Price-to-Earnings (P/E) Ratio?

The Price-to-Earnings (P/E) Ratio is an easy way to check how much investors are willing to pay for every rupee today that a company earns. In simple terms, it looks at how the price of a company's shares relate to its earnings per share (EPS). The price earnings ratio is also referred to as the PE ratio or as a price multiple.

If a stock has a high P/E, investors are expecting higher future growth. A low P/E may mean the stock is underpriced, or the company is expecting low future growth.

P/E Ratio Formula

The PE ratio formula calculation is very simple - just divide the market price per share by earnings per share (EPS). Here's how to calculate PE ratio:

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

• Market Price per Share: Refers to the current market price of one share on the stock market Magazine. 

• Earnings per Share (EPS): Refers to the net profit of the company divide over the total shares.

 

Example:

Suppose Company XYZ’s stock is ₹200, and the EPS is ₹10:

P/E Ratio=200/10=20

This implies, for every ₹1 that the company is earning, investors would pay ₹20. 

Within the context of determining if a stock is undervalued, fairly valued, or overvalued, the price earnings ratio matters significantly. If a company was consistently increasing, a higher P/E would be justified. If it doesn't, a higher P/E would indicate the stock price may be too high.

• High P/E: Suggests high investor expectations for future growth or a possibly overvalued stock.

• Low P/E: Might indicate undervaluation or doubts about future growth.

• No P/E: Companies with no profits (negative earnings) have no meaningful P/E.

Types of P/E Ratio

There are mainly two ways to calculate the P/E ratio:

Trailing P/E

The trailing price earnings ratio is one of the recommended metrics to use for an investor as it utilizes past earnings from a company for a specific time frame, allowing for a more accurate and objective way of reviewing a company's financial reality.

• Based on earnings from the past 12 months (called TTM—Trailing Twelve Months).

• Reflects actual performance.

• Most commonly used for comparing established companies.

Forward P/E

The Price to Earnings ratio (P/E) is calculated by dividing the price of a company's stock by its expected earnings per share (EPS) based on estimates of future earnings guidance. As this calculation is based on estimated future earnings, it is also known as the expected P/E ratio in the stock market. Investors use the forward price-to-earnings ratio to analyze how a company expects to perform in the future and its anticipated growth rate. 

• Based on estimated future earnings (usually next 12 months).

• Focuses on expected growth.

• Useful for fast-growing or cyclical companies.

Key Differences

A good analysis considers both types, especially for stocks with variable earnings.

Examples of the P/E Ratio

Example 1: Trailing P/E (Using PE Ratio Formula)

Stock price: ₹400
EPS (TTM): ₹20

P/E Ratio=400/20=20

Means: Investors pay ₹20 for every ₹1 earned last year.

Example 2: Forward P/E

Stock price: ₹250
Estimated EPS next year: ₹25

P/E Ratio=250/25=10

Meaning: Investors believe that the company will produce better earnings in the subsequent year, thus the "future" value. 

In order to successfully use the P/E ratio, remember to always compare companies in the same industry (in an example context, Banks to Banks, Tech to Tech). Different industries have different average P/E ratios.

Example:

• The tech sector may have a P/E of 20–40

• Banks 10–15

• Utilities 10–20

If a bank has a P/E of 25, it's high for banking, but not for tech. Always take sector averages into account.

P/E vs. Earnings Yield

Earnings Yield is simply the inverse of the P/E ratio:

If a stock's P/E is 20, its earnings yield is 5% (1 divided by 20 × 100).

Why use earnings yield?

• Makes it easy to compare stock returns to other investments (like bonds, FDs).

• Useful for cross-market/country valuation comparison.

P/E vs. PEG Ratio

The PEG (Price/Earnings to Growth) ratio adjusts the P/E by taking future growth into account:

• PEG < 1: Stock may be undervalued for its growth rate.

• PEG = 1: Fairly valued.

• PEG > 1: May be overpriced, unless justified by unique factors (e.g., strong brand, patents).

PEG ratio gives a more complete picture, especially for high-growth stocks because it tells you if you are overpaying for growth.

Absolute vs. Relative P/E

Absolute P/E

• The current P/E of a stock, using current price and earnings.

• Useful for a quick check.

• Example: If a stock trades at ₹100, EPS is ₹10, absolute P/E is 10.

Relative P/E

• Compares the company's current P/E to past P/Es, peers, or sector benchmarks.

• Helps see if a stock is cheap or expensive “relatively” (like to its 5-year average or index average).

• Gives a percentage context: If the current P/E is 25 and the 5-year high is 40, the relative P/E is 62.5% of that high.

Other P/E Considerations

• Cyclical Companies: The company's P/E may seem "high" or "low" as profits will vary based on economic cycles, in which case you will want to factor in "average earnings" when comparing (multi-year time frame).  

• Global and Sector Developments: Market-driven events (e.g., Inflation, crises, etc.) could inflate or depress all P/Es relative to a particular timeframe.  

• Accounting Differences: International companies could calculate earnings differently (i.e., Earnings per share).

Alternatives to P/E Ratios

If P/E is unavailable or questionable, here are other measures to consider:

• Price-to-Book (P/B): Usually for banks, insurance, and asset-heavy companies.

• Price-to-Sales (P/S): For companies with little or no earnings; strong for start-ups or emerging companies.

• EV/EBITDA: Measures operating earnings before accounting for interest, tax, and depreciation; this is more suited for companies that require substantial capital expenditures.

• PEG: A measure of cyclicality that corrects for growth.

• Dividend Yield: If the focus is on dividends.

Nifty P/E Ratio: Indian Market Benchmark

The Nifty PE Ratio represents the average P/E of the Nifty 50: India's largest 50 companies on the NSE. It is a good measure of overall market value.

• September 2025 Nifty 50 P/E is around 22

• Historical range: 15-25 on average, plus in the bull markets, or minus in periods of panic.

Interpretation:

• A high Nifty P/E indicates that stocks, in general, may be expensive.

• A low Nifty P/E indicates that stocks may be undervalued or the market is fearful.

Best P/E Ratio Stocks—Examples from India

Here are some examples of best PE ratio stocks from India with varying P/E ratios (September 2025):

Stocks with lower P/E are often considered for value investing, while high P/E stocks, if backed by strong growth prospects, may also be attractive for growth investors when identifying best PE ratio stocks.

What Is a Good Price-to-Earnings (P/E) Ratio?

P/E isn't universally "good" for every stock. It depends on industries, growth views, and the market cycle. In India, P/E of 20–25 is typically viewed as a balanced zone—indicating the stock is fairly valued.

• Under 15: May signal an undervalued company (or slow grower).

• 20–25: Generally thought to be good in India.

• Over 30: High, but could be rationalized for fast growers—more risk is taken on.

Always assess a company's P/E value in comparison to its industry, peers, and itself, historically (not the entire market).

Is It Better to Have a Higher or Lower P/E Ratio?

Lower Price-to-Earnings Ratios:

• Usually indicate a stock that is undervalued or the company has lower growth prospects.

• This is often attractive to value investors.

Higher Price-to-Earnings Ratios:

• Usually mean higher growth expectations (like in the technology sector).

• Usually they indicate the stock is overvalued if the growth doesn't happen.

Important note: A low Price-to-Earnings Ratio Does Not Always Indicate a Bargain and a High Price-to-Earnings Ratio is Not Always a Bad Sign. It depends on the purpose of the ratio -- ie, the company's earnings quality, industry standards, anticipated earnings growth, etc.

What Does a P/E Ratio of 15 Mean?

In the event a company has a Price/Earnings (P/E) of 15, it means you are paying ₹15 for every ₹1 of current earnings. At that rate, you will recover your investment in the company after 15 years of present profits, if profits are staying constant. Industry context is important, as a P/E of 15 may be considered good in banking, but low valuable in technology.

What Is the Difference Between Forward P/E and Trailing P/E?

Forward P/E gives a sense of market optimism or pessimism for future growth, while trailing P/E looks only at what’s already happened.

What Are the Limitations of the P/E Ratio?

• Not suitable for companies with no profits.

• Fails to account for future growth rates.

• Can be manipulated by accounting adjustments.

• Comparison across industries is unreliable.

• Ignores other critical factors like debt or Cash Flow changes.

Understanding what is PE ratio in share market and how to calculate PE ratio using the PE ratio formula is essential for making informed investment decisions. Whether you're analyzing individual best PE ratio stocks or tracking the broader Nifty PE ratio, the price earnings ratio remains one of the most valuable tools in fundamental analysis.

Conclusion

A clear grasp of the Price-to-Earnings ratio empowers beginners to spot fair-valued companies, compare peers within the same sector, and avoid overpaying for growth. Pair the P/E ratio formula with industry averages, look at both trailing and forward numbers, and cross-check other metrics (PEG, P/B, EV/EBITDA) before you invest. When used thoughtfully, the P/E ratio turns raw share-price data into meaningful insight for smarter, more confident decisions.

Disclaimer: This analysis is for educational purposes and not financial advice. Please consult a financial advisor before making investment decisions.

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