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What is P/E Ratio? Proven Guide to Stock Valuation 2025
What is P/E Ratio — Meaning & Formula
The P/E ratio (Price-to-Earnings) tells you how much investors are willing to pay today for each unit of a company’s earnings. Basic formula:
P/E Ratio = Current Market Price ÷ Earnings Per Share (EPS)
Example: If a stock trades at ₹500 and EPS is ₹25 → P/E = 500 ÷ 25 = 20. Investors are paying ₹20 for every ₹1 of earnings.
Types of P/E — Trailing vs Forward
Trailing P/E
Uses actual earnings from the past 12 months (TTM). More factual and less speculative — good for established companies.
Forward P/E
Uses estimated future earnings (analyst forecasts). Useful for growth stocks but depends on forecast accuracy — treat with caution.
P/E Ratio Example — Indian Stocks
Suppose Infosys is trading at ₹1,600 and EPS (TTM) = ₹80:
P/E = 1,600 ÷ 80 = 20
If the sector average P/E is 24, Infosys appears relatively cheaper; if the sector average is 18, it looks expensive. Always compare within the same sector because P/E norms differ widely.
For live data and sector P/E averages, use NSE India.
Why P/E Ratio Matters
- Quick screening tool to compare valuation between peers.
- Reflects market expectations about growth and profitability.
- Useful when combined with growth metrics (PEG) and balance-sheet checks.
High vs Low P/E — How to Read It
High P/E: Generally signals stronger growth expectations or market hype. Can indicate overvaluation if not backed by fundamentals.
Low P/E: Could mean undervalued stock or structural/earnings concerns. Evaluate reasons before assuming value opportunity.
Context matters — sector norms, growth prospects, capital structure and cyclical effects must all be considered.
Advantages & Limitations
Advantages
- Simple and widely understood.
- Good first-pass filter for valuation.
- Works well for stable, mature companies.
Limitations
- Doesn’t account for debt or cash on balance sheet.
- Misleading for cyclical companies or companies with volatile earnings.
- Forward P/E depends on analyst estimates; can be inaccurate.
P/E vs Other Valuation Metrics
| Metric | What it shows | Best use |
|---|---|---|
| P/E | Price relative to earnings | Quick valuation and peer comparison |
| P/B (Price/Book) | Price vs book value (assets minus liabilities) | Asset-intensive industries (banks, NBFCs) |
| EV/EBITDA | Enterprise value relative to cash profits | Compare firms with different capital structures |
How Trading Shastra Teaches Valuation
At Trading Shastra Academy, students learn P/E in context — alongside cashflow checks, debt analysis, and sector benchmarking. Courses include:
- Live case studies on Nifty & midcap companies
- Practical sessions: screening stocks using P/E + PEG
- Internship with capital-backed trading to apply valuation in real trades
Explore course details at Trading Shastra — Stock Market Courses.
Want hands-on mastery of P/E and other valuation tools? Get live mentorship, capital-backed practice and internship certification with Trading Shastra.
Explore Courses & EnrollFAQs — P/E Ratio
What is a good P/E ratio in India?
There is no single “good” P/E. Compare with sector average — IT sector often trades at higher P/E vs banks or commodity firms. Use sector-relative comparisons.
Is forward P/E better than trailing P/E?
Forward P/E is useful for growth narratives but depends on forecast accuracy. Trailing P/E is based on actual results and is more conservative.
Can P/E be negative?
Yes — when EPS is negative (company making losses), P/E is undefined or negative and not meaningful as a valuation metric.
How do I use P/E with other ratios?
Combine P/E with P/B, EV/EBITDA, ROE and growth metrics (PEG) to get a complete valuation picture.
