What is Price to Earnings (P/E) Ratio?
The Price to Earnings (P/E) ratio is one of the most widely used stock valuation tools. It tells you how much investors are willing to pay for each rupee of a company’s earnings. In simple terms, it shows whether a stock is expensive or cheap compared to its earnings.
Formula:
P/E Ratio = Current Share Price ÷ Earnings Per Share (EPS)
For example, if a company’s stock price is ₹200 and its EPS is ₹20, its P/E ratio will be 10.
Why is the P/E ratio important?
The P/E ratio helps investors understand:
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How the market values the company: Higher P/E means investors expect future growth.
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If the stock is undervalued or overvalued: Lower P/E may suggest undervaluation (or weaker growth expectations).
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Comparing similar companies: Helps compare companies within the same sector.
What is a good P/E ratio?
There’s no fixed number for a “good” P/E, but here’s a general industry-wise range:
| Sector | Typical P/E Range |
|---|---|
| IT & Technology | 20 – 40 |
| FMCG | 30 – 60 |
| Banking & Finance | 10 – 20 |
| Auto | 10 – 25 |
| Pharmaceuticals | 15 – 30 |
| Infrastructure/Metals | 8 – 15 |
Note: High-growth sectors like technology naturally have higher P/E ratios, while mature sectors like banking tend to have lower P/Es.
Real-life examples (As of 2025 stock data):
| Company | Current Price (₹) | EPS (₹) | P/E Ratio |
|---|---|---|---|
| Infosys | 1,550 | 65 | 23.8 |
| Hindustan Unilever | 2,500 | 45 | 55.5 |
| State Bank of India | 850 | 85 | 10 |
| Tata Motors | 1,200 | 50 | 24 |
(Note: Figures for example purposes only)
Common mistakes while using P/E ratio
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Ignoring growth rate: A high P/E may be justified if earnings are growing fast.
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Not comparing with industry peers: Comparing an auto stock to an IT stock on P/E is not meaningful.
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Overlooking one-time profits: Sometimes EPS includes one-time income, which can distort the ratio.
P/E ratio vs other valuation ratios:
| Metric | What it Shows |
|---|---|
| P/E Ratio | Price relative to earnings |
| P/B Ratio | Price relative to book value |
| EV/EBITDA | Enterprise value relative to operating earnings |
Final takeaway:
The P/E ratio is a quick, beginner-friendly tool to assess if a stock is reasonably valued. But it works best when compared within the same sector and after adjusting for company growth. Always combine P/E analysis with other financial ratios for better investment decisions.
