P/E ratio

The Price-to-Earnings (P/E) ratio is the most quoted valuation number in equity investing. It tells you how many years of current earnings it would take to "earn back" the price you're paying.

The formula

P/E = Share Price ÷ Earnings Per Share (EPS)
    = Market Cap ÷ Net Profit (PAT)

Both formulas give the same answer. Indian listed companies typically trade between 10x and 60x P/E, with the median around 25x.

Two variants

• Trailing P/E (TTM) = Mcap ÷ last 4 quarters of PAT. Backwards-looking.
• Forward P/E = Mcap ÷ expected PAT for next 12 months. Analyst estimates.

GuidanceIQ and most retail-facing sites quote trailing P/E unless marked otherwise.

What P/E really means

A 25x P/E means: at the current share price, if the company kept making the same PAT forever (no growth, no decline), it would take 25 years for you to "earn back" your investment.

A 50x P/E either means:

• The market expects huge growth ahead (probably realistic for a quality compounder)
• Or current earnings are unusually depressed (cyclical at trough)
• Or the stock is plain expensive