PE Ratio Explained: How to Value Stocks the Right Way

Learn what the PE ratio means in stock investing. A simple guide for Indian investors on how to use PE ratio for valuing stocks.

When investors talk about whether a stock is "cheap" or "expensive," they're usually referring to one number: the Price-to-Earnings (P/E) Ratio.

In the Indian stock market, the PE ratio is one of the most widely used metrics for valuing companies. But what does it really mean? How do you calculate it? And, most importantly, how should Indian investors use it wisely?

At AskAlpha.tech, we believe valuation metrics should be explained in plain, actionable language — so you can focus on clarity, not confusion.

What is the PE Ratio?

The PE ratio compares a company's share price to its earnings per share (EPS).

Formula:

PE Ratio = Price per Share / Earnings per Share (EPS)

👉 Example: If Infosys trades at ₹1,500 and its EPS is ₹75, its PE ratio = 20. This means investors are willing to pay ₹20 for every ₹1 of earnings.

Types of PE Ratios

Trailing PE → Uses past 12 months' earnings.
Forward PE → Uses projected earnings for the next 12 months.
Industry PE → Average PE of all companies in the same sector (banking, IT, pharma).

How Indian Investors Use PE Ratios

• Comparing Stocks → HDFC Bank vs ICICI Bank. • Comparing Sectors → Pharma may have higher PEs than PSU banks. • Market Sentiment → Nifty's PE often signals if the overall market is "expensive" or "cheap."

👉 On AskAlpha.tech, we are building dashboards where investors can instantly see sector-level PE comparisons for quick clarity.

Pros of PE Ratio

✅ Easy to understand. ✅ Useful for comparing companies in the same sector. ✅ Helps judge whether the market is overheated.

Limitations of PE Ratio

⚠️ Doesn't account for debt. ⚠️ Misleading if earnings are cyclical (like auto or commodities). ⚠️ Different industries naturally have different PE ranges — you can't compare Tata Steel with HDFC Bank.

Real-World Examples (India 2025)

• IT Sector: Infosys, TCS trade at 20–25 PE — justified by stable growth. • Banks: Private banks like HDFC trade at higher PEs vs PSU banks due to efficiency. • New-Age Tech IPOs: Many loss-making startups list with "infinite PE" since EPS is negative.

How to Use PE Ratio the Right Way

• Compare within the same sector. • Look at growth vs PE (PEG Ratio). • Combine with other metrics → ROE, debt-to-equity, cash flows. • Don't chase low PE blindly — sometimes cheap stocks stay cheap for years.

Tools to Track PE Ratio in India

• NSE & BSE websites → Market-wide PE. • Screener.in → Company-level ratios. • Moneycontrol → Sector averages. • AskAlpha.tech (Coming Soon) → Simplified PE dashboards + AI-powered valuation clarity.

Conclusion

The PE ratio is not a crystal ball — it's just one tool in your investing toolkit. Used wisely, it can help Indian investors decide whether a stock or even the entire market looks overvalued or undervalued.

At AskAlpha.tech, our goal is to make valuation metrics like PE accessible and actionable, so you don't get lost in financial jargon.

The takeaway? PE matters, but context matters more.