Understanding the P/E and PEG Ratio

The P/E ratio (price-to-earnings) is the most widely quoted valuation measure — and one of the most misunderstood. The PEG ratio improves on it by factoring in growth.

What P/E means

P/E = share price ÷ earnings per share (EPS). It tells you how much investors are paying for each ₹1 of the company’s annual profit. A P/E of 20 means you pay ₹20 for ₹1 of earnings. (Its inverse, the earnings yield, expresses the same thing as a percentage.)

There’s no single "good" P/E

A high P/E can mean a stock is expensive — or that the market expects fast growth. A low P/E can mean a bargain — or a struggling business. Always compare P/E:

• With the company’s own history.
• With industry peers.
• Against the growth the price implies.

PEG — P/E adjusted for growth

The PEG ratio = P/E ÷ earnings growth rate. It answers "is this P/E justified by the growth?" A PEG around 1 is often considered reasonable; well above 1 may signal you’re overpaying for the growth, and below 1 may flag relative value. It helps compare a fast-grower on a high P/E with a slow-grower on a low P/E fairly.

The caveats

Both rely on earnings, which can be volatile or distorted by one-offs, and PEG depends on a growth estimate that may not materialise. Use them with other measures, not alone. Education only, not a recommendation.