9.10 P/E ratio (Price-earnings ratio)

Hanumant Dhokle

Ratio Analysis

This is obtained as follows

Market Price Of The Share----------------------------------------------

For instance, as on October 20, 2003, the market price of TISCO was Rs 346.80. Its P/E ratio on that day was 346.80/27.51 = Rs 12.60.

Relevance Of PE Ratio:

This is the most important ratio for guessing the price of a share. The P/E ratio indicates the number of times the price of a share is more than its EPS. A company having a P/E ratio of eight has its price eight times over its EPS.

Which factors influence the P/E ratio?

The P/E ratio is a derivative of all stock-specific and market- specific factors that influence the price. For instance,

  1. P/E ratio of a company remains very high when the company has maintained sound financial health over the years.
  2. P/E ratio remains high when the management has consistently shown a good record. It does not go up if the investors do not trust the management. For instance, all Tata companies have high P/E ratios.
  3. If a company is a market leader having strong manufacturing, marketing and financial operations and has sound future plans, its P/E remains high. Blue chips like ITC, HLL, etc fall into this category.
  4. P/E ratio of any growth-oriented company is very high. A company like Divi’s Laboratories, which has grown substantially in the last few years, understandably has a high P/E ratio.
  5. When investors have high expectations about the future potential of some industry, the P/E ratios of all companies in that industry go up. Poor expectation about any industry results in a fall of the P/E ratios of all companies belonging to that industry. For instance, the average P/E ratio for the cement companies soared to 35 in July 1991, while the average P/E ratio of electronics’ companies languished at 17.6.
  6. P/E ratios of all companies go up during the bullish market and fall during the bearish phase.
Rate this article:
Comments are only visible to subscribers.

Equity Research


Investment in securities market are subject to market risks.Read all the related documents carefully before investing.
Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.