What is the P/E ratio and how to use it
The price-to-earnings (P/E) ratio is one of the most common numbers in stock news.
How it is calculated
P/E = share price divided by earnings per share (EPS) for a year.
For example, if a share costs Rs 200 and the company earned Rs 10 per share last year, its P/E is 20. That means investors are paying Rs 20 for every Re 1 of yearly profit.
What a high or low P/E can mean
- A high P/E can mean investors expect profits to grow fast. It can also mean the share is expensive.
- A low P/E can mean the share is cheap. It can also mean investors expect profits to fall.
How to use it properly
- Compare with companies in the same business. Banks and software companies are valued differently.
- Compare with the company's own past P/E.
- A company with losses has no meaningful P/E.
Limits of the P/E
It looks at one year's profit and ignores debt, growth and risk. Do not buy or sell a share on the P/E alone.
Trailing and forward P/E
Trailing P/E uses the past year's profit. Forward P/E uses expected profit, which is an estimate and can be wrong.
This article is for information and is not investment advice.