P/E Ratio

The P/E ratio is calculated by dividing a company's current share price by its earnings per share (EPS). A higher P/E suggests that the market expects strong future growth, while a lower P/E can indicate that a stock is relatively cheaper compared to its earnings — though neither interpretation is absolute without context.

In the Indian market, P/E multiples vary dramatically across sectors. Technology companies such as Infosys and TCS historically traded at P/E ratios well above 25x because investors paid a premium for their consistent earnings growth, dollar-denominated revenues, and high return ratios. Meanwhile, public sector banks and commodity companies often traded at single-digit P/Es due to cyclical earnings and lower growth visibility.

For Indian retail investors, the Nifty 50's trailing P/E is frequently cited as a broad market temperature gauge. Historically, when the Nifty P/E crossed 25–28x, markets were considered richly valued; when it fell below 15x — as it briefly did during the COVID-19 crash of March 2020 — it signalled deep pessimism. This index-level P/E is published daily by NSE and is freely accessible.

A common misconception is that a low P/E always means a stock is a bargain. A company can have a low P/E because its earnings are unsustainably inflated (a one-time gain, for instance) or because the business is in structural decline. Similarly, a high-P/E company like a fast-growing FMCG brand may justify its premium if earnings compound reliably over years. Always pair P/E with earnings quality checks.

Another caveat specific to India: reported profits can be affected by deferred tax assets, exceptional items, or changes in accounting standards (the Ind AS transition reshaped reported earnings for many companies). Stripping out these one-offs before computing P/E gives a cleaner picture of the underlying earning power.