Price-to-Earnings ratio (P/E) is the ratio of a stocks market price per share to its earnings per share. It tells you how many rupees the market is paying today for every Re 1 of annual profit.
Formula: P/E = Market Price per Share / Earnings per Share (EPS). Trailing P/E uses last 12-month EPS; Forward P/E uses forecast EPS.
Example: TCS trades at Rs 3,800 with trailing EPS of Rs 127. P/E = 3,800 / 127 = approximately 29.9x. Nifty 50 long-term median P/E sits near 20-22x.
When to use: Comparing two stocks in the same sector, or one stock against its own 5-year history. Combine with growth (PEG) and quality (ROE) for context.
When NOT to use: Loss-making companies (P/E is meaningless when E is negative), cyclicals at the top of a cycle (low P/E is a trap), or capital-intensive businesses where book value tells more (use P/B).
Caveat: Past performance is not indicative of future returns. A low P/E can stay low for years; a high P/E can keep expanding.