## What is PE Ratio? (Trailing P/E vs Forward P/E)

You must have heard the term P/E ratio a lot of times, but do you know what it really means and what do PE ratio figures imply? Well in this article, we are going to talk about the same.

**What is PE Ratio?**

P/E ratio means price to earnings ratio. **For example**, if the current price of a stock is Rs. 100 and it has earned Rs. 5 per share (EPS – Earning Per Share) for its shareholders in the past 12 months. The P/E ratio works out to be 100/5=20. Now what does it imply?

When we say a P/E ratio of 20, it means we are willing to pay Rs. 20 for each rupee the stock is earning. When the PE ratio is lower, it indicates that the stock is cheap and when the PE ratio is high, it means that the stock is expensive. PE ratio can be a factor to decide which stock to choose when the market capitalisation, growth rate, debt, risk, consumers, market segment, etc. is same for given two companies.

You cannot compare two stocks if they fall into separate segments. For example, capital intensive stocks like infrastructure, metals, auto, etc. would usually have lower PE ratio than the others like the ones offering services. If a company seems to be promising a steady growth in earning, you might want to pay a premium price to own that stock, as you are sure you would get back you money early. You also might want to pay a higher price for a stock which seems less risky/ which has delivered steady performance in the past. A debt ridden company’s PE may look good, but the debt of the company is not accounted for, in the PE ratio.

PE ratio where earnings of past twelve months is considered is called trailing PE ratio. But the past performance of the of a company may or may not be repeated.

**PE ratio of an Index** is the weighted average PE ratio of the stocks the index constitutes. A low PE of the Index indicates an undervalued market and a higher PE ratio indicates an overvalued market. An overvalued market gives you an exit opportunity, opportunity to book profits and shift your funds to debt, as the market may see correction and as a result may come down. An undervalued market indicates that you should invest into equities to participate in the stock appreciation. PE below 16 is considered a lower PE ratio for the Index and a PE higher than 21 is considered a higher PE ratio. Here is a chart showing how PE of the Nifty Index has been changing in last 10 years.

There is another term called a **forward PE ratio** which is based on the expected earnings of a stock in the coming 12 months. The forward PE ratio is based on analysis by research analysts, which can be speculative.

P/E ratio should not be used as a sole criteria to buy stocks. If PE ratio of a stock has dipped, you need to find out why has this happened, rather than believing, it is a good time to buy the stock.

## 37 Comments on "What is PE Ratio? (Trailing P/E vs Forward P/E)"

[…] Price-to-Earnings (PE) Ratio […]

[…] PE ratio – 13.09 (the PE was close to 20 when the stock was trading around Rs. 163) […]

[…] Price-to-Earnings (PE) Ratio […]

[…] Price-to-Earnings (PE) Ratio […]

[…] Price-to-Earnings (PE) Ratio […]

[…] other significance of EPS is that it helps you calculate PE ratio that is Price to earnings per share ratio. PE ratio is Price divided by earnings ratio where Price […]

[…] PE Ratio – The TTM PE ratio of Sterlite Technologies is close to 17.64 (Current Market Cap ÷ Net Profit, 9,000 ÷ 510). In March 2018, the PE ratio of the company was close to 40 (16,000 ÷ 334). The stock which was trading at PE levels of 40 is now being traded at PE levels of 17. The two reasons behind this are decrease in stock price and increase in Earnings Per Share (EPS). […]

[…] = P/E Ratio ÷ Growth of the […]

[…] the stock of was trading with a PE at the level of 20+. But after the fall, it was trading with a PE of around […]

[…] is so because the valuations given to the company were looking very rich and now too with a PE of 33 the company looks expensive as the earnings growth of the company can be taken as 15%-20%, […]

[…] PE Ratio – The current PE ratio of BEL is 10.19. The 3-year average PE of the company is 23 and 5-year average PE is 19. The current PE is 50% down than its 3-year and 5-year average PE. So, at this PE the company looks very attractive. […]

[…] – Page Industries is trading on rich valuations since a long time. The 3-year average PE ratio of Page Industries is close to 72 and the 5-year average PE ratio is almost 63 and that of 10-year […]

[…] other significance of EPS is that it helps you calculate What is PE Ratio that is Price to earnings per share ratio. PE ratio is Price divided by earnings ratio where Price […]

[…] What is PE Ratio […]

[…] the stock of was trading with a PE at the level of 20+. But after the fall, it was trading with a PE of around […]

[…] P/E Ratio – BPCL vs HPCL vs IOCL […]

[…] helpful than P/E ratio while comparing two firms with different financing structures. As EBITDA eliminates the impact of […]

[…] performance of the stocks in NIFTY50. Also, let’s analyze which stocks have gone up and how the P/E ratios of those companies have expanded, from the period of March 2017 to March 2019. The result of NIFTY […]

[…] is PE RatioWhat is PE Ratio– The TTM PE ratio of Sterlite Technologies is close to 17.64 (Current Market Cap ÷ Net […]

[…] P/E ratio does not factor in future earnings growth. Thus, the PEG ratio provides more insight into a […]

[…] PE Ratio = 27 […]

[…] 2.Price-To-Earnings (PE) Ratio : […]

[…] 3-Yr historical PE ratio of MRF Ltd is around 14-15. 5-Year historical PE ratio is around 17-18. The TTM PE ratio, or the […]

[…] PE Ratio : Asian Paints & Berger Paints are enjoying premium PE valuations. All the 4 companies are trading with PE values above their historical PE values. This means that the paint industry has always traded with premium valuations. And in comparison with that, the industry is trading with overvalued PE values currently. […]

[…] Nifty will rise till the range of 11,800-12,000. The market is already trading with a PE of 28+. And the large caps may not experience much of rally unless and until the Earnings Per […]

[…] PE Historical Performance […]

[…] Ratio : With a Price-to-Earnings (PE) ratio of 14.75, the stock of Sterlite Technologies Ltd look a little bit […]

[…] PE Ratio = 38.31 […]

[…] PE Ratio = 32.58 […]

[…] PE Ratio = 48.92, The stock is having a premium valuation. […]

[…] PE Ratio = 89, Here, an important aspect of valuation should be taken into the consideration by the investors that the underlying investments of the company is being traded at completely another parameters of valuation. Here, profitability is not the only parameter for PE valuation. And therefore, we should not evaluate the Info Edge (India) Ltd stock according to the usual PE valuation analysis. […]

[…] PE ratios of Kajaria cearmics, Somany and Asian Granito are 40.9, 33.21 and 37.08 respectively. […]

[…] releasing the results, total market cap of the bank falled to Rs.1.85 lakh Cr and PE ratio is corrected to 34 from 40 […]

[…] PE Ratio = […]

[…] PE Ratio = 19.86 […]

[…] and overall Sensex and Nifty Indices can go up in future. Thus, with these improved EPS numbers, price-to-earnings ratio can be rationalized in course of […]

[…] stock on the basis of following valuation factors : Revenue Growth, Profit Before Tax (PBT) Growth, PE Ratio, Market Capitalisation, […]