P/E ratio and key valuation ratios

The price-to-earnings (P/E) ratio divides a company's share price by its earnings per share — a measure of how much the market is paying for each rupee of current profit.

Reading it

A high P/E means the market expects strong future growth (or perceives the stock as low-risk); a low P/E suggests the opposite, or that the market sees real risk ahead. Neither is inherently good or bad — a P/E is only meaningful compared against something: the company's own history, or its direct competitors in the same sector.

The classic mistake: comparing P/E across sectors. A software company and a bank can have very different "normal" P/E ranges because their growth and capital profiles differ completely — comparing them tells you almost nothing.

Other ratios worth knowing

• EPS (earnings per share) — net profit divided by shares outstanding; the "E" in P/E.
• Dividend yield — annual dividend per share, as a percentage of price. Higher isn't automatically better — a very high yield can signal the market expects the dividend to be cut.
• Beta — how much a stock has historically moved relative to the index (covered in its own lesson on risk).

Where the limits are

P/E uses accounting earnings, which can be shaped by one-off items and accounting choices, and it becomes meaningless for a company with negative or near-zero earnings. Ratios are a starting point for asking better questions, not a final verdict.