The P/E ratio tells you how much investors are willing to pay for ₹1 of
the company’s earnings (profit).
🧮 Formula:
P/E Ratio=Market Price per ShareEarnings per Share (EPS)\text{P/E Ratio}
= \frac{\text{Market Price per Share}}{\text{Earnings per Share
(EPS)}}P/E Ratio=Earnings per Share (EPS)Market Price per Share
📍Example:
If a share is ₹200 and the EPS is ₹20:
P/E=20020=10\text{P/E} = \frac{200}{20} = 10P/E=20200=10
This means investors are paying ₹10 for every ₹1 of profit.
🧠 What Does It Tell You?
✅ High P/E = Expensive?
A high P/E (e.g., 40) means the stock is expensive compared to its
current earnings.
Investors expect high growth in future, so they’re willing to pay
more.
✅ Low P/E = Cheap?
A low P/E (e.g., 8) may mean the stock is undervalued—but maybe
for a reason (slow growth, risk, etc.)
💡 How to Use P/E Ratio Wisely
1. Compare with Industry
A banking stock with P/E 12 might be expensive or cheap—depending
on other banks.
Always compare apples to apples.
2. Compare with Company’s Past
Is current P/E higher than its 5-year average? Maybe it’s overvalued.
Lower than usual? It might be undervalued.
3. Combine with Growth (PEG Ratio)
PEG=P/EExpected Growth Rate (%)\text{PEG} = \frac{\text{P/E}}{\
text{Expected Growth Rate (\%)}}PEG=Expected Growth Rate (%)P/E
PEG < 1 is considered good (growth is faster than valuation)
Limitations of P/E Ratio
Doesn’t work well for companies with losses or irregular profits.
Can be misleading if EPS is inflated (e.g., one-time gains).
Growth stocks (like IT or FMCG) often have high P/E but still perform
well.
.
📈 Example (Indian Stocks)
Compan EP P/
Price Comment
y S E
HDFC ₹1,60
₹80 20 Reasonable for consistent growth
Bank 0
Tata
₹900 ₹60 15 Looks cheaper, but check debt, cycles
Motors
₹4,00 13
D-Mart ₹30 Very expensive—high growth priced in
0 3
Very cheap—maybe low growth
Coal India ₹450 ₹60 7.5
expectations
Bottom Line:
P/E tells you how expensive a stock is relative to its earnings.
Use it to compare, not blindly decide.
Combine with growth, quality, debt, and other ratios for a full
picture.
but if pe ratio is high then it means investors are willing to buy this stock. am
I right or wrong?
ChatGPT said:
✅ You're absolutely right—but there's a catch you need to understand
clearly.
Let me explain in simple, real terms:
✅ YES — A High P/E Means:
"Investors are willing to pay a higher price for each rupee of earnings."
This usually happens when:
They believe the company will grow fast in the future.
The company has strong brand, leadership, or stability.
It’s in a hot sector (like technology, FMCG, pharma).
❌ BUT — High P/E is Not Always a Good Sign
A high P/E can also mean:
The stock is overhyped (market is too optimistic).
It is overvalued (price too high for actual earnings).
There is speculation, not solid fundamentals.
📍 Think of it like this:
If people are paying ₹1000 for a pen worth ₹200, that shows belief—but
doesn’t guarantee that it’s really worth ₹1000.
🧠 Important: P/E Shows Belief, Not Truth
It reflects market expectations.
But the market can sometimes be wrong.
That’s why smart investors always ask:
“Is this P/E justified by the company’s future growth?”
🔍 Example:
EP Pric P/
Company Should You Worry?
S e E
Company A (growing 25% per ₹40 High P/E, but growth justifies
₹10 40
year) 0 it ✅
Company B (no growth, low ₹40 High P/E with no growth ❌
₹10 40
profit) 0 Risky!
✅ Summary:
True
Statement Explanation
?
High P/E means investors are
✅ They believe in future growth
interested
High P/E always means good
❌ It could be overvalued or risky
stock
High P/E is okay for fast-growing
✅ Growth supports high valuation
companies
Only if growth and fundamentals
Always buy high P/E stocks ❌
justify the price
So yes—you’re right that high P/E = market is willing to pay more. But
you should always ask:
“Is this price based on real growth or just hype?”
so if pe ratio is high then share may be overvalued and if pe ratio is low then
investors are not optimistic. then how can I now according to pe ratio stock is
good or bad for buy
ChatGPT said:
✅ Excellent question! You’re now asking the real investing question —
"How do I judge a stock using P/E ratio: Is it a good buy or a trap?"
Let’s answer this clearly and simply 👇
🧠 Basic Principle of P/E:
High P/E = Investors expect high future growth. Can be good or
risky.
Low P/E = Investors expect slow or no growth. Can be cheap or a
value trap.
So P/E ratio alone is not enough. But here's how to analyze P/E
properly:
✅ 1. Compare P/E with the Industry Average
A stock might look overvalued or undervalued unless you compare it with
similar companies.
P/ Sector Avg
Stock Interpretation
E P/E
Stock
30 30 Fairly valued
A
Stock
15 25 May be undervalued (opportunity)
B
Stock May be overvalued (risky unless high
45 20
C growth)
🟨 If P/E is lower than peers and the business is strong → ✅ Good sign
🟥 If P/E is higher than peers and growth doesn’t justify → ⚠️Risky
✅ 2. Check P/E vs Company’s Own History
Compare today’s P/E with:
Last 3-year average
Last 5-year average
📌 If current P/E is lower than its past average, but earnings and growth
are stable → Possibly undervalued.
✅ 3. Use PEG Ratio (P/E to Growth)
This is the smartest way to judge P/E:
\text{PEG Ratio} = \frac{\text{P/E Ratio}}{\text{Expected Earnings Growth
Rate (%)}}
PEG Meaning
Undervalued for its
<1
growth ✅
= 1 Fairly valued
>
Overvalued or risky ⚠️
1.5
Example:
If P/E = 30 and expected growth = 20%,
PEG = 30 / 20 = 1.5 → On the expensive side.
✅ 4. Check Earnings Stability (Consistency is Key)
High P/E is okay if:
Earnings are growing steadily
Business has strong brand or moat
Debt is under control
But low P/E + falling earnings = value trap ❌
✅ 5. Understand the Sector
FMCG, IT, Pharma = Usually have high P/E due to reliable growth.
Cyclical sectors (Auto, Metal, Real Estate) = May have low P/E
during slowdowns.
So a low P/E metal stock during downcycle may be normal, not a sign
to panic.
📌 Final Checklist: Is the P/E “Good” or “Bad”?
Good
Question What to Check
Signal?
Screener.in → Valuation
Compared to industry average? ✅
section
Compared to company’s own
3Y / 5Y average P/E ✅
history?
Calculate or find on financial
Is PEG < 1? ✅
sites
Are earnings growing? Past 5 years → Profit growth ✅
Is business quality high? ROCE, debt, brand ✅
🧠 Summary:
Don’t ask: "Is P/E high or low?"
Ask: "Is this P/E justified by the company’s growth, stability, and
strength?"
ok i understood that if i find a share with high intrinsic value and a justified
pe then I can go with this share
ChatGPT said:
🎉 Exactly! You’ve nailed it. That’s the right mindset of a smart,
fundamentals-based investor. Let’s recap your conclusion with full clarity:
✅ Your Winning Formula:
✔️Step 1: Intrinsic Value > Market Price
The stock is undervalued.
There’s a margin of safety.
Good starting point.
✔️Step 2: P/E Ratio is Justified
It’s not blindly high or low—it matches the company's growth and
quality.
Use PEG ratio or compare with industry & historical P/E.
🧠 When both conditions are met:
The stock is likely undervalued and fundamentally strong, and worth
considering for investment.
✅ Bonus: Add These Final Filters
Before investing, just double-check these:
Filter What to Check
🧾 ROCE > 15% Efficient use of capital
💵 Debt/Equity < 1 Financial safety
📈 Profit & Sales
Past 3–5 years
Growth
👨💼 Promoter Holding
Confidence of owners
High
Pledging, frauds, huge
📣 No red flags
losses
🚦 What You Should Do Next:
1. Make a watchlist of such stocks.
2. Study 1–2 companies each week (start with simple ones).
3. Track their price vs value over time.
4. Enter in small portions (SIP-style) if you're confident.
5. Hold with patience—value investing works long-term.
but tell me step by step that how will i justify the pe ratio
ChatGPT said:
Absolutely! 👌 Let's now focus step-by-step on:
“How do I justify the P/E ratio of a stock?”
(i.e., how to know if it’s reasonable, expensive, or a bargain)
✅ Step-by-Step Guide to Justify the P/E Ratio of a Stock
🔹 Step 1: Find the Stock’s Current P/E
You can check this from:
Screener.in
Moneycontrol, TickerTape, or NSE India site
📌 Example:
Suppose you find Stock X has a P/E = 25
🔹 Step 2: Compare with Industry Average P/E
Why? Because P/E differs from sector to sector.
On Screener.in, scroll to the "Peers" section.
Compare your stock’s P/E with 3–5 competitors in the same industry.
P/
Company
E
Your stock 25
Peer 1 28
Peer 2 24
Peer 3 26
P/
Company
E
Industry
26
Avg
✅ If your stock's P/E is close to or lower than industry average → It’s fairly or
attractively valued.
🔹 Step 3: Compare with the Stock’s Own Historical P/E
Why? Because the stock’s past tells you what the market usually pays for it.
Use Screener → Chart section → Click on "Valuation" → Check 5Y P/E
average
P/
Period
E
5-year
28
avg
Current 25
✅ If current P/E is lower than historical P/E → Might be undervalued
🔹 Step 4: Check Company’s Growth Rate (EPS or Profit)
Why? Because P/E is justified if earnings are growing fast.
Go to:
Screener → Profit & Loss section → EPS Growth or PAT Growth
Use past 5-year CAGR (Compound Annual Growth Rate)
Example:
EPS Growth = 20% CAGR over 5 years
P/E = 25
Looks justified because the company is growing fast.
🔹 Step 5: Use the PEG Ratio (Optional but Powerful)
PEG Ratio=P/E RatioEarnings Growth Rate (%)\text{PEG Ratio} = \frac{\
text{P/E Ratio}}{\text{Earnings Growth Rate (\
%)}}PEG Ratio=Earnings Growth Rate (%)P/E Ratio
Example:
P/E = 25
Growth Rate = 20%
PEG = 25 / 20 = 1.25
PEG
Meaning
Value
<1 Undervalued ✅
1–1.5 Fairly valued ⚖️
Possibly overvalued
> 1.5
⚠️
🔹 Step 6: Check the Quality of Earnings
Even with a “low” P/E, ask:
Are earnings consistent? (not jumping up/down)
Are profits real or due to one-time events?
Is profit supported by cash flow?
You’ll find this on:
Screener → "Cash Flow from Operations" vs Net Profit
Annual Report → Notes on earnings
🧠 If P/E is low but earnings are not stable or real, it’s a trap.
🔹 Step 7: Add Context (Debt, Sector, Brand, etc.)
Ask:
Is the company in a safe, growing sector (like FMCG, IT)?
Does it have a brand or moat?
Is debt under control?
A company with high quality may deserve a higher P/E.
✅ Summary Table
Ste
Check What to Look For
p
Screener/
1 Current P/E
Moneycontrol
Compare with
2 Sector average P/E
peers
3 Historical P/E 5Y or 10Y avg
4 Earnings Growth Past 3–5 years CAGR
5 PEG Ratio < 1 is ideal
6 Earnings Quality Stable & cash-backed
Sector, debt, brand
7 Other Factors
power
🧠 Final Thought:
P/E ratio becomes meaningful when you compare it with growth, history,
sector, and quality.
Then only you can say:
🔹 “This stock is cheap.”
🔹 Or “It’s expensive but worth it.”
🔹 Or “It’s a trap.”
