# What is P/E Ratio? | Price to Earning Ratio

P/E Ratio (Price to earning ratio) is a very important valuation ratio. P/E Ratio shows that if the company distributes its entire profit among its shareholders and shows the same performance in the coming years.

So how many years will it take to recover the money you are investing in that company.

For example: If you are investing 1 lakh rupees in Company A and the P/E Ratio of Company A is 5 then it means that Company A distributes its entire profit among its shareholders.

And if it shows the same performance in the coming years also, then in 5 years your investment of Rs 1 lakh will be recovered.

## Formula to Calculate P/E Ratio (Price Earnings Ratio)

The formula for P/E Ratio (Price to earning ratio) is P/E = Share Price divided by EPS (Earning per share).

EPS (Earning per share) means if the company divided its entire profit among the shareholders, then how much money would the shareholders get behind 1 share?

## Formula to Calculate EPS (Earning Per Share)

The formula for EPS (Earning per share) is EPS = Earning (Profit) divided by numbers of outstanding shares.

## What is P/E Ratio (Price to earning ratio)?

If the P/E Ratio (Price to Earning Ratio) is low, it means that either the stock is undervalued, that is it is getting cheap valuations or the investors do not have much faith in the future performance of the company.

Therefore he is not interested in that stock.

Read Also: Stock Market Timings in India

Usually, people understand that if a company’s P/E Ratio (Price to Earning Ratio) is low then that stock is undervalued.

But the P/E Ratio is low so that stock is undervalued, there is nothing like that.

The reason behind its low P/E Ratio may also be that that stock is performing poorly or the future prospects are not looking right to the investors, so investors are preferring to stay away from that stock.

## Why is the company’s P/E ratio low and high?

Some people just buy shares because the P/E ratio is low. Those companies which are on the verge of closure also have a low P/E Ratio, so it does not mean that that company is also getting cheap.

So to understand the P / E Ratio well, you have to know that if the P / E Ratio is low then why is it. If you know the reason for it, then only you will be able to use it well.

If the P/E Ratio of a stock is high, it means that either the stock is overvalued i.e. it is getting an expensive valuation, or the investors have some special confidence in the future performance and future growth of the company.

That’s why he is very interested in the stock.

People understand that if a company has a high P/E Ratio then it is overvalued but the P/E Ratio is high so that stock is overvalued, it is not so.

This could also be the reason behind its high P/E Ratio that the stock is performing well and investors have a lot of confidence in its future growth.

## Eicher Motors

The P/E Ratio of Eicher Motors 5 years ago was 65 and its share price was Rs 2700. Today the share price of Eicher Motors is 28000 and its P/E Ratio is 34.

So the higher the P/E Ratio, the more the stock is overvalued, it is not so, its future potential can be strong. Due to which their P/E Ratio can be high.

Just something is getting cheap, so buying it is also not right, you have to look at other things too.

For example: If you go to buy a T-shirt then you are just getting it cheap so don’t buy it, you see its quality, colour, material all these.

Any T-shirt is good, its quality is also good and if you are getting it cheap then it will be a good deal.

Therefore, do not buy shares in a hurry, just after checking a couple of things, do a complete analysis of the company and only then buy shares.

## How to Find the P/E Ratio of a Company

Because the financial ratio is just a small part of fundamental analysis. The best way to check whether the P/E Ratio is low or high is to compare the P/E Ratio of that company with the rest of the companies in that industry.

Or you can simply compare the company’s P/E with its industry P/E. Industry P/E means the average ratio of that entire industry.

For example, The P/E Ratio of the IT industry will be the average of the P/E Ratio of all the IT companies.

So if you want to know whether the P/E Ratio of Infosys is less or more then for this you can compare the P/E Ratio of Infosys with the P/E Ratio of other IT companies.

Or you can directly compare the P / E Ratio of Infosys with the P / E Ratio of the IT industry. When you search for the name of a share by going to money control, then here you will get the P / E Ratio of the share industry.

Different industries have different ways of earning money of companies, their business style is also different, so the methods of calculating their valuation are also different.

So instead of looking directly at the P/E ratio, you should compare it with the rest of the companies in its industry.

And the main thing is that just by checking the P / E Ratio will not work, you have to find out whether the P / E Ratio is low or high, then that is the reason.

Is the good profit earned by the company recently, is it temporary or is its performance going to remain intact?

For example, many times what happens is that due to the one-time income of the company, there is a big change in the P/E Ratio of the company.

That’s why you should know the reason why the P/E Ratio happened more or less.

The P/E Ratio is a very important valuation ratio, but to understand the valuation of the company, you cannot rely on just one valuation ratio.

To understand the valuation of the company, you also need other valuation ratios like:

1. EV/EBITDA
2. Price Earning Growth
3. Price Cash Flow Ratio

These should also be watched. Also, if you take out the valuation of the company, it will be even better.

What is the formula to calculate P/E Ratio (Price Earnings Ratio)?

The formula for P/E Ratio (Price to earning ratio) is P/E = Share Price divided by EPS (Earning per share).

What is the formula to calculate EPS (Earning Per Share)?

The formula for EPS (Earning per share) is EPS = Earning (Profit) divided by numbers of outstanding shares.