P/E and valuation: Why a great company can still be a bad buy
How to calculate the P/E ratio, compare it with the sector and the stock’s own history, and why a great company can still be a bad buy.
P/E tells you how much you pay for ₹1 of profit
| Measure | FY20 | FY21 | FY22 | FY23 | FY24 |
|---|---|---|---|---|---|
| Net profitleft after interest and tax, ₹ crore | 100 | 115 | 130 | 150 | 170 |
| P/Eshare price ÷ earnings per share | 22 | 25 | 31 | 44 | 58 |
P/E is share price ÷ earnings per share. A P/E of 30 means you pay ₹30 for every ₹1 the company earns in a year. A high P/E is a bet that profit will grow fast.
What to look for
- P/E vs sector: much higher than similar companies? It needs a reason.
- P/E vs its own past: is the stock priced higher than it usually is?
- Profit growth: fast growth can justify a high P/E. Slow growth can’t.
When the P/E shrinks back to normal, the share price can fall even while profit grows.
The share price is ₹600 and earnings per share are ₹20. What is the P/E?
- 30
- 12,000
- 3.3
Show the answer
30. 600 ÷ 20 = 30. You are paying ₹30 for each ₹1 of yearly profit.
What the numbers showed
From FY22 the stock got more expensive every year, reaching 58 while profit grew a steady 14%. The price ran far ahead of the business.
When the P/E shrinks back to normal, the share price can fall even while profit grows.
Practise P/E and valuation, free
Reading about it is step one. In MarketSeekho you look at a company’s numbers, make a call, say why, and get graded on your reasoning, not luck.
Common questions
What is P/E and valuation?
P/E is share price ÷ earnings per share. A P/E of 30 means you pay ₹30 for every ₹1 the company earns in a year. A high P/E is a bet that profit will grow fast.
What should I look for in p/e and valuation?
P/E vs sector: much higher than similar companies? It needs a reason. P/E vs its own past: is the stock priced higher than it usually is? Profit growth: fast growth can justify a high P/E. Slow growth can’t.
The share price is ₹600 and earnings per share are ₹20. What is the P/E?
30. 600 ÷ 20 = 30. You are paying ₹30 for each ₹1 of yearly profit.
How can I practise p/e and valuation for free?
MarketSeekho has a free four-page chapter on P/E and valuation (learn, answer a question, spot it in a company’s numbers, then make a call) and an unlimited Cheap or expensive? practice game graded on your reasoning. No sign-up or money needed.