Learn·Ratios & valuation
What is the P/E ratio?
The price-to-earnings (P/E) ratio divides a company’s share price by its earnings per share — the price being paid for one rupee of annual profit. A P/E of 20 means the company is valued at twenty times its yearly earnings. It is the most used, and most misused, valuation shorthand.
What the number contains
A P/E compresses the market’s entire view of a company — growth expectations, quality of earnings, risk — into one ratio. High-growth businesses command higher multiples because buyers pay for future earnings, not just current ones; slow, cyclical or leveraged businesses trade lower. That is why P/E comparisons only mean much within a sector, against a company’s own history, or against its growth rate.
Trailing P/E uses the last four reported quarters; forward P/E uses estimated future earnings and inherits the estimate’s optimism. Indian data sources conventionally quote trailing twelve-month (TTM) P/E, which is what Solomo’s screener and company pages compute from reported results.
Where P/E misleads
The ratio breaks down at earnings extremes. A company with collapsing profits can show a huge P/E precisely because the E has shrunk — optically “expensive” at the bottom of its cycle. One-off gains (asset sales, write-backs) inflate E and make the P/E look temporarily cheap. Loss-making companies have no meaningful P/E at all.
For cyclical sectors — metals, sugar, shipping — P/E is often lowest at the peak of the cycle, when earnings are unsustainably high, and highest at the trough: the opposite of what naive reading suggests. Cross-checking against book value, cash flow and return ratios is how a single-ratio mistake is avoided.
Frequently asked questions
What is a good P/E ratio?
There is no universal threshold. The same P/E can be cheap for a fast-growing consumer business and expensive for a cyclical commodity producer. Context — sector norms, the company’s own history, growth and earnings quality — does the work the raw number cannot.
Why is a company’s P/E different on different websites?
Sources differ on the E: standalone versus consolidated earnings, whether exceptional items are excluded, and how stale the price is. Comparing P/Es only makes sense when they are computed the same way.
What is the PEG ratio?
P/E divided by the earnings growth rate, an attempt to normalise the multiple for growth. It inherits the flaws of both inputs — especially the growth estimate — and is a rough screen rather than a precise measure.
Explore the data
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