30-Day Stock Market Series
Day 12 of 30
P/E Ratio Deep Dive: Is This Stock Cheap or Expensive?
The Price-to-Earnings ratio is the most quoted valuation metric in investing. But most retail investors misuse it. Day 12 sets the record straight.
What Is the P/E Ratio?
P/E = Market Price Per Share / Earnings Per Share (EPS)
A P/E of 25 means you're paying ₹25 for every ₹1 of annual earnings. It tells you how expensive the market's expectations are relative to current profits.
Types of P/E
Trailing P/E (TTM)
Based on last 12 months' actual earnings. More reliable. Less forward-looking.Forward P/E
Based on next 12 months' estimated earnings. More relevant for growing companies. Subject to analyst error.# Calculate P/E ratio
market_price = 1600 # Current share price
eps_ttm = 72.5 # Trailing 12 months EPS
eps_forward = 88.0 # Analyst estimate next year
trailing_pe = market_price / eps_ttm
forward_pe = market_price / eps_forward
print(f"Trailing P/E: {trailing_pe:.1f}x | Forward P/E: {forward_pe:.1f}x")
# Output: Trailing P/E: 22.1x | Forward P/E: 18.2x
Sector-Adjusted P/E
P/E must always be compared within the same sector. A P/E of 15 is expensive for a public sector bank but cheap for a consumer brand:
- FMCG (HUL, Nestlé): 50–80x — premium for stability and brand
- IT Services (TCS, Infosys): 25–35x — moderate growth, dollar earnings
- PSU Banks: 6–12x — value play, political risk
- NBFCs: 15–35x — depends on growth and NPA quality
- Auto: 12–25x — cyclical, economy-linked
PEG Ratio: P/E with Growth Adjustment
PEG = P/E Ratio / Earnings Growth Rate (%)
PEG < 1 = potentially undervalued (paying less than growth justifies). PEG > 2 = expensive. A stock at P/E 40 growing at 40% has a PEG of 1 — fairly valued.
P/E TrapsAvoid: (1) Cyclical stocks at low P/E at peak earnings — this is actually expensive. (2) Loss-making companies — P/E is meaningless. (3) One-time income boosting EPS artificially.
Today's Exercise
Pick 5 stocks in one sector. Calculate their P/E, sector average P/E, and 5-year historical P/E range. Identify which are above or below their own history.