Chapter 7: Fundamental Analysis
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Day 36: P/E Ratio — Cheap or Expensive?
The most used valuation metric — and why context is everything
2 min read
📖 Buying a Tea Shop
Robert's tea shop earns ₹10 lakh profit/year. Buyer A offers ₹50 lakh → P/E = 5x. Buyer B offers ₹2 crore → P/E = 20x.
Buyer B is paying more — but is he stupid? Not if Robert is about to open 100 new branches. High growth justifies high multiples.
P/E alone tells you nothing. P/E in context tells you everything. 🍵
Robert's tea shop earns ₹10 lakh profit/year. Buyer A offers ₹50 lakh → P/E = 5x. Buyer B offers ₹2 crore → P/E = 20x.
Buyer B is paying more — but is he stupid? Not if Robert is about to open 100 new branches. High growth justifies high multiples.
P/E alone tells you nothing. P/E in context tells you everything. 🍵
P/E Ratio Explained
P/E = Share Price / Earnings Per Share (EPS)
Example: Infosys Share Price = ₹1,500. Annual EPS = ₹60.
P/E = 1,500 / 60 = 25x
The market is paying 25 times Infosys's annual earnings. At current earnings, it would take 25 years to "earn back" the price through profits.
Example: Infosys Share Price = ₹1,500. Annual EPS = ₹60.
P/E = 1,500 / 60 = 25x
The market is paying 25 times Infosys's annual earnings. At current earnings, it would take 25 years to "earn back" the price through profits.
Industry P/E Benchmarks
| Sector | Typical P/E | Why |
|---|---|---|
| IT / Software | 25–40 | High growth, recurring revenues |
| Banking | 15–25 | Regulated, stable but slower growth |
| FMCG | 40–60 | Defensive, premium for stability |
| Metals / Mining | 8–15 | Cyclical, unpredictable |
| Pharma | 20–35 | R&D pipeline value |
PEG Ratio — The Smarter Version
PEG = P/E / Annual EPS Growth Rate
PEG < 1.0 = Potentially undervalued even with high P/E
Example: P/E = 30, Growth = 35% → PEG = 0.86 → Actually cheap! 🎯
PEG = P/E / Annual EPS Growth Rate
PEG < 1.0 = Potentially undervalued even with high P/E
Example: P/E = 30, Growth = 35% → PEG = 0.86 → Actually cheap! 🎯
🎉 NIFTY 50 P/E — The Market Mood Ring!
NIFTY historical average P/E ≈ 20x. Below 15–18 = cheap territory. Above 25 = expensive. Above 30 = euphoria. NSE publishes this daily — one of the most useful free data points for gauging overall market valuation!
NIFTY historical average P/E ≈ 20x. Below 15–18 = cheap territory. Above 25 = expensive. Above 30 = euphoria. NSE publishes this daily — one of the most useful free data points for gauging overall market valuation!
🎯 Takeaway:
P/E = Price / EPS. Always compare within same industry. PEG ratio is smarter than P/E alone. NIFTY P/E 15–20 = reasonable zone. 25+ = expensive. Tomorrow: ROE, Debt & Free Cash Flow!
P/E = Price / EPS. Always compare within same industry. PEG ratio is smarter than P/E alone. NIFTY P/E 15–20 = reasonable zone. 25+ = expensive. Tomorrow: ROE, Debt & Free Cash Flow!