Price-to-earnings ratio
Also called: P/E ratio · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT
Meaning
The price-to-earnings (P/E) ratio shows how much investors pay for each rupee of a company's profit.
P/E ratio = Share price ÷ Earnings per share (EPS)
EPS is the company's profit divided by the number of shares. A high P/E usually means investors expect strong growth in future, or that the share is expensive. A low P/E may mean the share is cheap, or that growth is expected to be weak. The ratio is useful for comparing companies in the same industry.
Example
A share trades at Rs 500 and the company earns Rs 25 per share. The P/E is 500 ÷ 25 = 20. Investors are paying Rs 20 for every Rs 1 of yearly profit.
Don't confuse with
- Market capitalisation-to-GDP ratio: measures the value of the whole stock market against the whole economy. P/E looks at one company, or one index, against its profits.
Related concepts
- Secondary market
- Depository
- Demat account
- Clearing corporation
- T+1 settlement
- Algorithmic trading
- Circuit breaker
- Sensex
- Nifty 50
- Market capitalisation