Stock prices alone mean nothing. The P/E ratio—price-to-earnings—answers the real question: How much are investors paying for every rupee of profit? A share at ₹500 tells nothing without knowing if the company earned ₹50 or ₹100 per share. That’s the P/E gap most traders miss.
Understanding P/E
Divide stock price by earnings per share. A tech firm at ₹600 with ₹30 earnings per share = P/E of 20. Investors paid ₹20 for every rupee of earnings. But here’s where traders stumble—P/E of 20 isn’t automatically expensive. A software company growing 40% annually at P/E 20 looks cheap versus a commodity business at P/E 15 slowing down.
Trailing vs Forward P/E
Trailing P/E uses past 12 months of actual profits—solid historical data. Forward P/E uses analyst estimates for next year. If forward P/E sits lower than trailing P/E, the market bets earnings will surge. But analyst estimates miss constantly—don’t trust them blindly.
Critical Mistakes
Never compare P/E ratios across different industries. HDFC Bank trades P/E 28 while Tata Motors sits at 16—completely different businesses. Banks typically trade higher due to earnings stability. Comparing destroys analysis.
Low P/E doesn’t mean undervalued. Mining stocks sit at P/E 8 because commodity prices whip around wildly. High P/E doesn’t mean overvalued—software at P/E 40-50 crushes it through explosive growth.
Using P/E for Selection
Compare within the same industry. Check historical P/E ranges—not snapshots. If a bank traded P/E 20-25 for five years but now sits at 15, that’s meaningful.
Never decide on P/E alone. Layer in cash flow, debt, competitive positioning, and growth visibility.
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