**Price: The company’s stock price **

**Earnings Per Share (EPS)**: **It is the portion of a company's net income that would be earned per share if all profits were paid out to its shareholders. **

**It is an indication of the financial health of the company. **

**Example, **

**If there is a company ABC with the market price of share at Rs 100 and the earnings per share is Rs 10.**

** So, the P/E ratio is 100/10 = 10. This means the market is willing to pay Rs 10 for every rupee of the company’s earnings. **

**After learning to calculate the P/E ratio, the next step is to learn how to interpret the high, low, and negative ratios. **

__P/E Ratio a Relative Concept__

**The P/E ratio is only a relative measure. So, a ratio is higher or lower only when we compare it to another company in the same industry or to the company’s performance itself.**

**HIGH P/ E Ratio:** **A high P/E Ratio is observed for Companies that grow faster than average, such as technology companies, typically have higher P/Es. A higher P/E ratio shows that investors are optimistic about the company’s growth in the future and are willing to pay a higher share price now due to growth expectations in the future.**

**LOW P/E Ratio:** **A low P/E ratio means the share price is lower than the company's earnings.**

**Negative P/E ratio**:** If a company has negative earnings, which means that they are losing money will have a negative P/E ratio. Sometimes established companies can face negative growth due to management and control reasons. **

**However, one should not invest in a company that experiences consistent negative growth.**

__Price / Earnings Growth Ratio (PEG) __

**The PEG ratio measures the relationship between the price/earnings ratio and earnings growth to provide investors with a more complete story than the P/E alone.**

__PEG helps to compare different industries before investing. __

**This facilitates the comparison of different industries, and each tends to have its own historical P/E ranges. Here's a comparison of the relative valuation of an Ed Tech stock and a Manufacturing company.**

**Important Note: **

**These two fictional companies have very different valuations and growth rates, but the PEG ratio gives an orange-to-orange comparison of the relative valuations. **

**Example **

**The PEG ratio of the NSE 50 would be 16 / 12 = 1.33 if the NSE 50 had a current P/E ratio of 16 times trailing earnings and if the average analyst estimate for future earnings growth in the NSE 50 is 12% over the next five years**

**A Word of Caution **

**Any P/E ratio should be considered against the backdrop of the P/E for the company's industry and Sectoral Performance projections for the next five years.**

Lakshmi Monga

Well Being Shiksha Foundation

Brand Ambassador