The P/E ratio, or price-to-earnings ratio, is a company's share price divided by its earnings per share. A stock at Rs 1,000 earning Rs 50 a share has a P/E of 20, meaning investors pay Rs 20 for every rupee of annual profit. It is the most used valuation shortcut in the market. The Nifty 50 traded at a trailing P/E of about 19 in October 2026, below its five-year average of around 22.
The P/E ratio turns a share price into something comparable. A Rs 100 share is not cheaper than a Rs 5,000 share. What matters is what each rupee of price buys in profit. Dividing price by earnings per share gives a number that can be set against other companies, against the company's own past and against the market as a whole. Another way to read it: at a P/E of 20, the company would take 20 years of current profits to earn back its price.
The formula
P/E ratio equals market price per share divided by earnings per share. Earnings per share is net profit divided by the number of shares. The trailing P/E uses the last four reported quarters. The forward P/E uses analysts' estimates for the next year and is lower for a growing company. When a report quotes a P/E without saying which, it is usually trailing. The same ratio at company level is market capitalisation divided by net profit, which gives the same answer.
A worked example
A company earns Rs 500 crore and has 10 crore shares, so its earnings per share is Rs 50. The share trades at Rs 1,000. The P/E is 20. If a peer with similar growth trades at a P/E of 15, the first company looks expensive. If the peer trades at 30, it looks cheap. Flip the ratio and it becomes the earnings yield: Rs 50 on Rs 1,000 is 5%. That is the number to compare with a fixed deposit rate, remembering that earnings can grow while a deposit rate cannot.
How to read it
A high P/E means the market expects earnings to grow fast, or it means the stock is overpriced. A low P/E means the market expects earnings to stall or fall, or the stock is overlooked. The ratio alone cannot say which. Growth is the missing piece. A company growing earnings at 25% a year can be fairly priced at a P/E of 30. One growing at 5% is dear at 15. Dividing the P/E by the growth rate gives the PEG ratio, where a figure near 1 suggests fair value. The ratio also depends on the sector. IT and consumer companies in India have long traded at P/E ratios of 30 to 60. Banks, metals and oil trade at 8 to 15. Comparing across sectors is a common mistake.
Where it misleads
Earnings can be distorted. A one-off gain from selling a property inflates profit for a year and makes the P/E look low. A one-off loss does the opposite. Cyclical companies look cheapest at the top of the cycle, when profits are at a peak that will not last, and most expensive at the bottom. A company with no profit has no P/E at all, which is why loss-making growth companies are valued on sales or on the P/B ratio instead. And accounting choices on depreciation or one-time items can move earnings per share by enough to change the picture.
The market P/E
The Nifty 50's trailing P/E was about 19 in early October 2026, down from above 22 at the 2025 peak after the index fell and earnings kept growing. Readings under 15 have marked buying opportunities in India, and readings above 25 have usually been followed by poor returns over the next few years. It is a blunt tool. It said the market was expensive for most of 2021 and 2024, and the market kept rising. As one input into how much to hold in equity, though, it has a good record. The practical use of P/E in picking stocks, including the traps, is covered in how to use the P/E ratio for stock selection. For a contrast with a stock priced on growth rather than current earnings, see Nvidia's share price and P/E.
FAQs
What is a good P/E ratio?
There is no universal number. Compare with the sector and with the company's own history. For the Nifty 50, below 18 has historically been cheap and above 24 expensive.
What is the difference between trailing and forward P/E?
Trailing uses the last 12 months of actual earnings. Forward uses the next 12 months of estimated earnings, which can be wrong.
Can a P/E ratio be negative?
Only if earnings are negative, in which case it is not reported. A loss-making company has no meaningful P/E.
Where can the Nifty P/E be found?
NSE publishes the daily P/E, P/B and dividend yield of all its indices on its website.