The P/E ratio: what it tells you and what it doesn't

The price-to-earnings ratio tells you how many rupees the market is paying for one rupee of a company's annual profit. It's simple, which is both its strength and its weakness.

If a share trades at Rs 300 and EPS over the last twelve months was Rs 30, the P/E is 10×. Equivalently, the earnings yield (EPS ÷ price) is 10%, a handy way to compare a share with bank deposit or treasury yields.

What a low or high P/E can mean

• Low P/E: the stock may be undervalued, or the market may expect earnings to fall, see risks in the business or doubt the quality of the profits.
• High P/E: investors may expect strong growth, or the stock may simply be expensive.
• Negative or meaningless P/E: the company is loss-making or earnings are close to zero, so use other measures.

Common pitfalls

• Comparing across sectors: banks, cement makers and tech companies naturally trade on very different multiples. Compare a company with its own peers and its own history.
• One-off profits: a gain on asset sales or a tax reversal can inflate EPS and make the P/E look artificially low.
• Cyclical earnings: in cyclical sectors, P/E often looks lowest at the peak of the cycle, just before profits fall.
• Interest rates: when rates are high, investors generally demand lower P/E multiples, and the reverse applies when rates fall.

In the PakStockLab screener you can filter by P/E alongside ROE, P/B and dividend yield, then use Compare to put shortlisted companies side by side.