What you need
- P/E Ratio = Price ÷ EPS — Shows how much you pay for each rupee/dollar of company earnings
- Lower P/E = Potentially Undervalued — But could also mean poor growth prospects or problems
- Higher P/E = Growth Expectations — Markets willing to pay premium for expected future earnings
- Always Compare Within Sectors — Tech P/E of 40 is normal; Bank P/E of 40 is insane
- Use PEG for Growth Stocks — PEG = P/E ÷ Growth Rate. Under 1 = undervalued, over 2 = expensive
- Trailing vs Forward PE — Trailing uses past earnings (reliable), Forward uses estimates (speculative)
What is P/E Ratio? (Simple Explanation)
P/E Ratio Definition
Price-to-Earnings Ratio (P/E) is a valuation metric that compares a company's current stock price to its earnings per share (EPS). It essentially tells you how much investors are willing to pay for each rupee or dollar of the company's profits. A P/E of 20 means investors pay ₹20 for every ₹1 the company earns annually.
Think of it this way: If you bought a business that makes ₹1 lakh per year, how much would you pay for it?
- If you pay ₹10 lakh → Your P/E is 10 (you'll recover investment in 10 years from earnings)
- If you pay ₹20 lakh → Your P/E is 20 (20 years to recover from earnings alone)
- If you pay ₹50 lakh → Your P/E is 50 (you're betting on massive future growth)
The P/E ratio is fundamentally asking: "How many years of current earnings am I paying for this company?"
Valuation Compass
P/E helps you determine if a stock is cheap, fair, or expensive relative to its earnings power. It's the first metric most investors check.
Comparison Tool
Compare stocks within the same industry to find relatively undervalued opportunities. A bank with P/E of 8 vs 15 deserves investigation.
Historical Context
Compare a stock's current P/E to its own historical average. Trading below 5-year average P/E? will likely be undervalued.
"Price is what you pay. Value is what you get. The P/E ratio helps you understand the relationship between the two."
— Warren Buffett's Investment Philosophy
Why P/E Ratio Matters
The P/E ratio matters because it directly connects price to value. Here's what it reveals:
Critical Warning
A low P/E doesn't automatically mean "buy" — the company should be facing problems. A high P/E doesn't mean "sell" — it expect to justify the premium with explosive growth. Always investigate the WHY behind the number.
Contrarian Take
Everyone's worried about Meta's metaverse spending. They should be. But what they miss is that Meta's AI advertising engine is so far ahead, they can burn $10B yearly on moonshots and still dominate.
P/E Ratio Formula & Calculation
The P/E ratio formula is beautifully simple, yet incredibly powerful for stock analysis.
Step-by-Step Calculation Example
Let's calculate the P/E ratio for HDFC Bank using real data:
Interpretation: Investors are paying ₹19.60 for every ₹1 of HDFC Bank's earnings. Compared to the banking sector average P/E of ~12-15, HDFC commands a premium due to its quality and growth track record.
Alternative P/E Calculation
You can also calculate P/E using Market Cap instead of stock price:
This gives the same result but uses aggregate numbers instead of per-share values.
What is a "Good" P/E Ratio?
The million-dollar question. There's no single "good" P/E number — it depends entirely on context. Here's the framework professional investors use:
P/E Below 15
Potentially Undervalued — Could be a bargain or could be a value trap. Investigate why the market is pricing it cheap. Cyclical industry? Management issues? Declining business?
P/E 15-25
Fair Value Zone — The sweet spot for quality companies with moderate growth. Most stable blue-chips trade in this range. Lower risk, reasonable expectations.
P/E Above 25
High Growth Premium — Markets expect significant future earnings growth. Justified for tech disruptors, but dangerous if growth doesn't materialize.
The Three Rules of P/E Analysis
- Rule 1: Compare Within the Same Sector — A P/E of 30 is cheap for software but expensive for banks. Always compare apples to apples.
- Rule 2: Compare to Historical Average — Is the stock trading above or below its own 5-year average P/E? This reveals relative valuation.
- Rule 3: Consider Growth Rate — A P/E of 30 with 40% growth is cheaper than P/E of 15 with 5% growth. Use PEG ratio for this.
| P/E Range | What It Usually Means | Typical Stocks | Investor Action |
|---|---|---|---|
| Below 10 | Deeply undervalued OR troubled company | PSU banks, cyclicals in downturn | Deep dive research required |
| 10-15 | Value territory, moderate growth expected | Private banks, mature industrials | Attractive for value investors |
| 15-25 | Fair valuation, quality companies | FMCG, Pharma, quality banks | Standard investment zone |
| 25-40 | Growth premium, high expectations | IT services, consumer brands | Only if growth justifies |
| Above 40 | Hyper-growth or bubble territory | Tech startups, new-age cos | High risk, use PEG ratio |
Trailing PE vs Forward PE: Know the Difference
Not all P/E ratios are created equal. The two main types tell you very different stories about a company's valuation.
Trailing P/E (TTM)
- Uses last 12 months of ACTUAL earnings
- Based on real, audited financial data
- More reliable and verifiable
- Standard for most stock screeners
- Backward-looking, may miss turnarounds
- Doesn't reflect future growth
Forward P/E
- Uses ESTIMATED future 12-month earnings
- Reflects growth expectations
- Useful for fast-growing companies
- Shows what market expects
- Based on analyst estimates (can be wrong)
- Overly optimistic estimates are common
Scenario: Zomato trades at ₹250 with Trailing P/E of 150x (expensive!), but Forward P/E of 45x.
What it means: Analysts expect Zomato's earnings to grow 3x+ next year. If they're right, the stock isn't as expensive as trailing P/E suggests. If they're wrong, you overpaid massively.
Pro Tip: Use Trailing P/E for value stocks, Forward P/E for growth stocks — but always verify the estimates are realistic.
P/E Ratio by Industry (2026 Benchmarks)
Different industries have vastly different "normal" P/E ranges. Here's your reference guide for 2026:
| Sector | Typical P/E Range | Why? | Key Stocks |
|---|---|---|---|
| IT Services | 22-35 | High margins, predictable revenue, global demand | TCS, Infosys, Wipro |
| Private Banks | 12-20 | Regulated, leveraged business, NPA risks | HDFC, ICICI, Kotak |
| PSU Banks | 6-12 | Government interference, lower quality | SBI, PNB, BOB |
| FMCG | 40-70 | Defensive, brand moats, steady growth | HUL, Nestle, Britannia |
| Pharma | 20-35 | R&D cycles, patent cliffs, global markets | Sun Pharma, Dr. Reddy's |
| Auto | 15-30 | Cyclical, EV transition uncertainty | M&M, Tata Motors, Maruti |
| Metals & Mining | 5-15 | Highly cyclical, commodity price dependent | Tata Steel, JSW, Hindalco |
| Real Estate | 10-25 | Cyclical, capital intensive, project-based | DLF, Godrej Properties |
| New-Age Tech | 50-200+ | Growth-focused, many unprofitable | Zomato, Paytm, Nykaa |
Pro Tip: Sector Rotation Strategy
When a sector's average P/E drops significantly below historical average, it will likely signal a buying opportunity. When P/E expands well above average, consider taking profits. This is how institutional investors play sector rotations.
P/E Ratio Calculator Tool
Use this free calculator to analyze any stock's P/E ratio and compare it against industry benchmarks.
P/E Ratio Calculator
Enter stock details to calculate P/E, PEG ratio, and get valuation insights
*Calculator is for educational purposes only. Not financial advice.
PEG Ratio: The P/E Upgrade for Growth Stocks
P/E ratio has a major flaw: it ignores growth. A P/E of 50 for a company growing 50% annually is different from a P/E of 50 for a company growing 5%. Enter the PEG ratio.
How to Interpret PEG Ratio
Stock A: P/E of 15, Growing at 8% → PEG = 1.87
Stock B: P/E of 35, Growing at 40% → PEG = 0.87
Verdict: Despite Stock A having lower P/E, Stock B is actually cheaper when growth is factored in. Stock B offers better value relative to its growth rate.
"The PEG ratio is a quick way to see if a stock is reasonably priced given its growth rate. A PEG of 1 means fair value; below 1 is a potential bargain."
— Peter Lynch, Legendary Fidelity Fund Manager
Limitations: When P/E Ratio Fails
P/E is powerful but not perfect. Knowing its limitations makes you a better investor.
Loss-Making Companies
P/E is meaningless when EPS is negative. You get a negative ratio that's impossible to interpret. Use Price-to-Sales or EV/Revenue instead.
Cyclical Industries
P/E can be misleadingly low at cycle peaks (high earnings) and high at troughs (low earnings). Use average earnings over full cycle.
Different Accounting
Companies in different countries use different accounting standards. Earnings can be manipulated. Always check cash flow too.
High Debt Companies
P/E ignores debt. A company with P/E of 10 but massive debt is riskier than P/E of 20 with zero debt. Use EV/EBITDA for debt comparison.
One-Time Items
Unusual gains/losses distort EPS. A one-time asset sale can inflate earnings temporarily. Use normalized or adjusted EPS.
Share Buybacks
Companies can artificially boost EPS through buybacks (fewer shares = higher EPS). Check if earnings actually grew or just shares reduced.
The Value Trap Warning
A stock trading at P/E of 5 should look like a screaming buy — but if earnings are about to collapse 80%, that P/E will quickly become 25. Low P/E companies often have P/E compression for valid reasons. Always investigate WHY it's cheap before buying.
Real Stock Analysis Examples
Let's apply everything we've learned to analyze real stocks.
Verdict: At P/E 27 and PEG 1.5, Reliance is trading at fair value for a diversified conglomerate. Not cheap, not expensive. The Jio and retail businesses justify the premium over traditional oil & gas peers.
| Metric | TCS | Infosys | Winner |
|---|---|---|---|
| Trailing P/E | 28x | 25x | Infosys (cheaper) |
| Revenue Growth | 8% | 12% | Infosys |
| PEG Ratio | 3.5x | 2.1x | Infosys |
| ROE | 48% | 32% | TCS (quality) |
Conclusion: Based on P/E and PEG alone, Infosys appears better value. But TCS's superior ROE and consistency justify a premium. This is why P/E is just one factor — you need the full picture.
P/E Ratio FAQs
There's no universal "good" P/E. As a general guide: P/E under 15 may indicate undervaluation, 15-25 is fair value, above 25 suggests growth expectations. Always compare within the same sector — a P/E of 12 is expensive for PSU banks but cheap for IT stocks. Use PEG ratio (P/E ÷ Growth Rate) for growth stocks; PEG under 1 is typically attractive.
Extremely high P/E ratios (100+) occur when: 1) Investors expect explosive future growth (like early Amazon), 2) Current earnings are temporarily depressed, 3) The stock is in a speculative bubble, or 4) The company just turned profitable with minimal earnings. New-age tech stocks often trade at 100+ P/E because markets are pricing in multi-year growth. Whether this is justified depends on actual growth delivery.
No! A low P/E can be a value trap. Companies trade at low P/E for reasons: declining business, industry disruption, management issues, or impending losses. Always investigate WHY a stock is cheap. Compare to peers and historical P/E. If a stock historically traded at P/E 20 and now trades at 10, find out what changed. Low P/E is only attractive if the reasons for low valuation are temporary or fixable.
Most financial websites display P/E prominently: Screener.in, Moneycontrol, Tickertape, Google Finance, Yahoo Finance. You can also calculate it yourself: Current Stock Price ÷ Trailing 12-month EPS. For Indian stocks, check the BSE/NSE websites or annual reports for EPS data. Stock screeners let you filter by P/E ranges to find undervalued stocks in specific sectors.
The Nifty 50 P/E ratio fluctuates with market cycles. Historical average is around 20-22. When Nifty P/E goes above 25, markets are considered expensive (expect lower future returns). When below 18, markets are attractive. Check NSE India website for current Nifty PE. As of 2026, Nifty P/E trades around 22-24x, indicating fair-to-slightly-expensive territory.
P/E uses market cap and net income; EV/EBITDA uses enterprise value (market cap + debt - cash) and operating profits before interest, tax, depreciation. EV/EBITDA is better for comparing companies with different debt levels and is preferred for asset-heavy industries (telecom, utilities). P/E is simpler and works well for debt-free, profitable companies. Use both for complete analysis.