What's a good P/E ratio to buy at?

It depends on the industry and growth rate. For mature companies, P/E of 10-15 is attractive. For growth stocks, P/E of 20-30 can be reasonable if growth justifies it. Compare to industry average.

How do I find a stock's P/E ratio?

Every stock screener and broker platform shows P/E ratio. Check Screener.in (India), Yahoo Finance, or your broker app. It's usually displayed prominently on the stock's overview page.

What's the difference between trailing and forward P/E?

Trailing P/E uses last 12 months' earnings (historical). Forward P/E uses next 12 months' estimated earnings (future). Forward P/E is more relevant for growth stocks but relies on estimates.

Can P/E ratio predict stock performance?

Not directly. Low P/E stocks can stay cheap for years. High P/E stocks can keep rising. P/E is a valuation tool, not a timing tool. Use it to avoid overpaying, not to predict short-term moves.

P/E Ratio Explained: How to Value Stocks Like a Pro (2025)

Q: Is a lower P/E always better?

Not always. A low P/E (below 10) can mean the stock is cheap, but it can also mean the company is in trouble or declining. Always investigate why the P/E is low before buying.

"Price is what you pay. Value is what you get." — Warren Buffett.

Stock A trades at ₹2,000. Stock B trades at ₹50. Which is cheaper? Most beginners say Stock B. They are wrong.
Without knowing the earnings, the price is just a number. The P/E Ratio is the universal translator that tells you if a stock is a bargain or a rip-off.

Introduction: The "Gravity" of Finance

In physics, gravity pulls everything down. In finance, Valuation is gravity.
A stock price can fly up on hype for a while, but eventually, it must return to its earnings reality. The P/E ratio measures this distance between Hype (Price) and Reality (Earnings).

Part 1: The Formula Explained

P/E = Stock Price ÷ Earnings Per Share (EPS)

Scenario A (The Lemonade Stand)

You want to buy your neighbor's lemonade stand.
Price: He asks for $200.
Earnings: The stand makes $20 profit per year.
P/E: 200 ÷ 20 = 10.
(It will take 10 years to earn your money back).

Scenario B (The Tech App)

You want to buy a mobile app business.
Price: He asks for $200.
Earnings: The app makes $4 profit per year.
P/E: 200 ÷ 4 = 50.
(It will take 50 years to earn your money back).

Why would anyone buy B? Growth. If the App grows 100% per year, that P/E falls rapidly.

Part 2: Trailing vs Forward (The Trap)

When you look at a website like Yahoo Finance or MoneyControl, check which P/E you are looking at.

Trailing P/E (TTM)

Based on Last 12 Months Earnings

Pros: Real, audited data. Fact.
Cons: Past performance. Doesn't account for future slowdowns.
Verdict: Safe, conservative.

Forward P/E

Based on Next 12 Months Estimates

Pros: Looks at future potential.
Cons: "Estimates" are often wrong. Analysts tend to be overly optimistic.
Verdict: Risky, but better for Growth Stocks.

Part 3: The PEG Ratio (Peter Lynch's Secret)

Legendary investor Peter Lynch famously said, "P/E is useless without Growth."
A P/E of 30 looks expensive. But if the company is growing at 30% per year, it is actually cheap.
Enter the PEG Ratio (Price/Earnings-to-Growth).

PEG Ratio = P/E Ratio ÷ Annual Growth Rate (%)

PEG < 1.0Undervalued (Buy)

PEG = 1.0Fairly Valued

PEG > 1.5Overvalued (Sell)

Example:
Company A has P/E 20 and grows 10% (PEG = 2.0) -> Expensive.
Company B has P/E 40 and grows 50% (PEG = 0.8) -> Cheap!
This is how investors justified buying Amazon at 100 P/E for years.

Part 4: Sector Cheat Sheet

Never compare apples to oranges. A bank will always have a lower P/E than a software company due to leverage and risk.

Sector	Avg P/E (Historical)	Why?
Technology	25 - 35	High growth, scalability, low assets.
FMCG / Consumer	35 - 50	Extreme stability, brand loyalty (Nestle, HUL).
Banking / Finance	10 - 15	Cyclical, highly leveraged, regulation risk.
Utilities / Power	8 - 12	Slow growth, heavy debt, dividend focus.
Metals / Comm.	5 - 10	Highly cyclical. Low P/E often indicates "Peak Cycle".

Part 5: Warning - The "Value Trap"

You see a stock with a P/E of 4. It looks incredibly cheap. You buy it.
Next month, the stock drops 50%.
You just fell into a Value Trap.

The Dying Giant

Educational Example

Why low P/E can be fatal

The Setup

A legacy camera company is trading at $100. It earned $20 per share last year.
P/E = 5. (Very Cheap).

The Reality

Everyone knows smartphones are killing cameras. The market expects earnings to drop to $5 next year.
The market has already priced this in. You are looking at Trailing Earnings (History), but the market is pricing Future Earnings (Disaster).

How to Avoid It:

Never buy low P/E without checking Revenue Growth. If Revenue is shrinking, it is not a Value Stock; it is a Melting Ice Cube.

This is a hypothetical scenario using historical market data for educational purposes only. Past performance does not guarantee future results.

Part 6: Beyond P/E (Advanced Metrics)

P/E does not work for every company. Here are the pro tools for different scenarios:

EV / EBITDA

Use For: Asset-heavy companies with Debt (Telecom, Steel, Power).
Why: It ignores debt structure and depreciation differences. Neutralizes the impact of taxes.

Price-to-Sales (P/S)

Use For: Tech Startups & SaaS.
Why: Many startups have NO earnings (Negative P/E). Revenue is the only dependable metric. P/S under 10 is usually standard for SaaS.

Price-to-Book (P/B)

Use For: Banks & Insurance.
Why: Banks are basically buckets of money (Assets). P/B tells you if you are paying $1.50 for $1.00 of assets. P/B < 1 is undervalued.

Part 7: Shiller P/E (CAPE)

Standard P/E fluctuates wildly with 1-year earnings.
Nobel Prize winner Robert Shiller invented the CAPE Ratio (Cyclically Adjusted P/E).

It uses the average earnings of the last 10 years adjusted for inflation.
It smooths out boom and bust cycles.
Rule of Thumb:
- CAPE > 30: Market is in a Bubble (Dotcom 2000, 2021). Expect low returns for next 10 years.
- CAPE < 15: Market is Cheap (2009 bottoms). Expect high returns for next 10 years.

Part 8: Earnings Yield (Stocks vs Bonds)

How do you know if Stocks are better than Fixed Deposits (Bonds)?
Invert the P/E ratio.

Earnings Yield Formula1 ÷ P/E Ratio

If Nifty P/E is 20:
Yield = 1 ÷ 20 = 5%.

The Comparison

Scenario: Bond Yield (Risk Free) is 7%.
Stock Yield is 5%.
Verdict: Stocks are EXPENSIVE. Why take risk for 5% when you can get 7% guaranteed?

Scenario: Bond Yield is 2%.
Stock Yield is 5%.
Verdict: Stocks are CHEAP. (This drove the 2010-2020 bull run).

Part 9: DCF - The Gold Standard

P/E is "Relative Valuation" (Comparing stock to stock).
DCF (Discounted Cash Flow) is "Absolute Valuation" (Finding the true worth).

"A bird in the hand is worth two in the bush." — Aesop.

DCF calculates the present value of all future cash money the company will ever make.
If DCF Value > Stock Price = Undervalued (Buy).
If DCF Value < Stock Price = Overvalued (Sell).
Note: DCF is complex math. P/E is the shortcut. But smart money always checks DCF.

Part 10: Reverse DCF (The Pro Move)

Instead of trying to guess the growth rate (which is impossible), do it backwards.
Ask: "What growth rate is the current price implying?"

• Stock A trades at $100.
• Use a Reverse DCF Calculator.
• Result: The market is pricing in 25% growth for the next 10 years.
• Your Job: Ask yourself, "Can this company grow at 25% for 10 years?"
• If YES: Value might be fair.
• If NO (e.g. market is saturated): The stock is Overvalued.

Part 11: The 10-Point Valuation Checklist

Before you buy, run the stock through this gauntlet.

Is PEG Ratio < 1.5?

Is P/E lower than industry average?

Is Revenue growing > 10%?

Is Debt-to-Equity < 1.0 (or appropriate for sector)?

Is Cash Flow Positive? (Earnings can be faked, cash cannot).

Is P/B < 1.5 (For Banks/Asset heavy)?

Part 12: Case Study (Nifty 2008 & 2020)

History doesn't repeat, but it rhymes.

Jan 2008 (The Peak)

Nifty P/E hit 28.
Everyone said "India Shining." "This time is different."
Result: Nifty crashed 60% in 1 year.

March 2020 (Covid Crash)

Nifty P/E hit 17 (after the fall).
Everyone said "World is ending."
Result: Nifty doubled in 18 months.

Lesson: Buy Fear (Low P/E). Sell Greed (High P/E).

FAQ

Is a lower P/E always better?

Not always. As discussed in "Value Traps", a low P/E can mean the company is dying. A P/E of 5 is often riskier than a P/E of 25.

Can a company have no P/E?

Yes. If a company is losing money (Negative Earnings), it has no P/E ratio. This is common for high-growth startups (like Uber or Airbnb in early days) or biotech firms.

What P/E is "Fair" for Nifty 50?

Historically, Nifty 50 average P/E is around 18-20.
Above 25 = Dangerous Zone (Correction likely).
Below 15 = Buy Zone (Great long term returns).

Why does Amazon have a P/E of 100?

Amazon intentionally reinvested all profits back into growth for 20 years, showing "low earnings" on paper. Investors looked at "Price to Sales" or "Operating Cash Flow" instead of P/E. Now that they are maturing, their P/E is normalizing.

Price is Noise. Value is Signal.

Mastering the P/E ratio protects you from the two biggest sins of investing: buying hype at the top (High P/E) and catching falling knives at the bottom (Value Trap).

Check the Sector

Context is king

Check the Growth

Use PEG Ratio

Check the Debt

Avoid traps

Strategy: Buy Undervalued Stocks →Strategy: Dividend Yield →

P/E Ratio Explained: Are You Overpaying for Stocks?

Key Takeaways

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