What is the P/E ratio?

The P/E ratio (price-to-earnings) is the market's favourite shorthand for "is this stock cheap or expensive?" It answers one question: how many rupees are you paying for every ₹1 of the company's annual profit?

The formula

P/E = Share price ÷ Earnings per share (EPS)

If a share trades at ₹200 and its EPS is ₹10, the P/E is 20. You're paying ₹20 for each ₹1 of yearly profit. Put differently: at today's profit, it would take 20 years to earn back your price.

What counts as high or low?

There's no universal number — it depends entirely on the business:

• A steady, slow-growing company (say a utility) might fairly trade at a P/E of 12–18.
• A fast-growing company can command 40, 60, even higher, because investors are paying for future profit, not just today's.

So a P/E is only useful in context — compare a company to its own history and to its direct peers, never across unrelated sectors.

The traps

• Earnings can be lumpy. A one-off gain shrinks the P/E and makes a stock look cheap when it isn't.
• Losses break it. A loss-making company has no meaningful P/E at all.
• Cheap can be a trap. A low P/E sometimes means the market expects profits to fall — not a bargain, a warning.
• High isn't always overpriced. A quality compounder can stay "expensive" for years and still reward you.

How to actually use it

Treat P/E as a starting question, not an answer. A low P/E asks "why is the market pessimistic?" A high one asks "what growth is being priced in, and is it realistic?" Pair it with growth, debt, and cash flow — and read the company's story before the number. The ratio is a thermometer, not a diagnosis.