Knowledge Base

PE ratio and EPS are two of the most commonly used metrics when evaluating a stock. They help you quickly assess whether a stock is expensive or fairly priced relative to its earnings.

EPS – Earnings Per Share

EPS tells you how much profit a company has earned per share.

EPS = Net Profit ÷ Total Number of Shares Outstanding

For example, if a company earns ₹100 crore in net profit and has 10 crore shares, its EPS is ₹10. A higher EPS generally means the company is more profitable. Tracking EPS over multiple years tells you whether earnings are growing.

PE Ratio – Price to Earnings Ratio

The PE ratio tells you how much you are paying for every ₹1 of the company’s earnings.

PE Ratio = Current Share Price ÷ EPS

If a stock is trading at ₹200 and its EPS is ₹10, the PE ratio is 20 meaning you are paying ₹20 for every ₹1 of earnings.

How to use PE ratio

• A high PE could mean the stock is expensive, or that investors expect strong future growth
• A low PE could mean the stock is undervalued, or that growth prospects are weak
• PE ratio is most useful when compared against the company’s historical PE or against peers in the same sector

PE ratio alone does not tell you whether to buy or sell. It is one data point among many and works best alongside other research.