Understanding the P/E Ratio in Valuation
The Price-to-Earnings (P/E) Ratio is among the most widely used metrics in finance and investment banking.
🔹 Formula: P/E = Price per Share ÷ Earnings per Share (EPS)
🔹 Meaning: It reflects how much investors are willing to pay today for ₹1 of earnings.
Interpretation
A High P/E usually signals strong growth expectations.
✅ Positive Scenario: Tech companies like Infosys often trade at higher multiples because investors expect strong earnings growth.
⚠️ Risk Scenario: Sometimes high P/E reflects overhype, like in the dot-com bubble, where many firms had valuations disconnected from fundamentals.
A Low P/E often suggests undervaluation.
✅ Positive Scenario: Cyclical companies or sectors temporarily out of favor (like auto or metals during downturns) may offer value opportunities.
⚠️ Risk Scenario: It could also mean weak growth prospects or structural issues — e.g., some PSU banks trading at low multiples due to asset quality concerns.
P/E the starting point for valuation
Infosys: P/E \~28 → justified by strong growth outlook.
PSU Banks: P/E \~8–10 → reflects slower growth and higher risks.
The P/E ratio serves as a key starting point for valuation. In investment banking and equity research, it is always analyzed alongside peers, industry context, and other valuation methods like EV/EBITDA, PEG, and DCF.
📌 Takeaway: High or low P/E is neither good nor bad in itself — the context defines the meaning.
