The formula
P/E = share price ÷ earnings per share (EPS). If a share costs Rs 400 and the company earned Rs 20 per share over the year, the P/E is 400 ÷ 20 = 20. Investors are paying 20 rupees for every rupee of yearly profit.
A live example
How to read it
- A lower P/E can mean the share is cheaper relative to its profit, or that investors expect profits to fall.
- A higher P/E can mean investors expect strong growth, or that the share is expensive.
- No P/E, or "loss", means the company made a loss, so the ratio has no meaning.
A P/E number is never good or bad alone. Compare it with the same company's past P/E and with other companies in the same sector.
Compare within a sector
Banks, hydropower companies and insurance companies earn money in different ways, so their typical P/E ratios differ. Compare NABIL with other commercial banks, not with a hotel or a hydropower company. Our sector pages list companies by sector so you can compare.
Where P/E can mislead you
- One-off profits. A company can post a big profit from selling an asset, which makes its P/E look low for a year.
- Quarterly numbers. Companies report every quarter. A P/E based on one quarter's EPS may be annualised, so check which one is used.
- Different accounting. Do not compare across industries.
- It ignores debt and growth. Two companies with the same P/E can be very different businesses.
Practise using it
Pick three companies from one sector, write down their P/E, and decide which you would buy and why. Then test it in a free practice account and see what happens over a few weeks.
For education only. Not investment advice.