What is PE Ratio?

The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative to its per-share earnings. For example, suppose that a company is currently trading at Rs. 100 a share and its earnings over the last 12 months were Rs. 5 per share. The P/E ratio for the stock could then be calculated as Rs.100/Rs.5, or Rs. 20. EPS is most often derived from the sum of last four quarters. While EPS of a company remains the same for a quarter or a year, the stock market price changes everyday and hence the PE ratio also changes.

What different PE slabs denote?

N/A : A company with no earnings has an undefined P/E ratio. By convention, companies with losses (negative earnings) are usually treated as having an undefined P/E ratio, even though a negative P/E ratio can be mathematically determined.

0–10 : Either the stock is undervalued, or the company’s earnings are thought to be in decline. Alternatively, current earnings may be substantially above historic trends or the company may have profited from selling assets.

10–17 : For many companies a P/E ratio in this range may be considered fair value.

17–25 : Either the stock is overvalued or the company’s earnings have increased since the last earnings figure was published. The stock may also be a growth stock with earnings expected to increase substantially in the future.

25+ :A company whose shares have a very high P/E may have high expected future growth in earnings, or this year’s earnings may be considered exceptionally low, or the stock may be the subject of a speculative bubble.

P/E History of Nifty – 2007 to 2015

### How to calculate PE Ratio of Nifty?

Like for a company, PE can also be calculated for the benchmark indexes like Sensex, Nifty, Bank Nifty etc.

Let us explain you how to calculate the PE of Nifty which consists of 50 stocks. As we explained earlier, PE is a ratio of the market price and EPS for a company. Now if the same number multiplies the numerator and denominator, the value of this ratio will not change.

For determining the PE for the Nifty, we multiply both the market price and EPS by number of shares outstanding.

Now, PE = market price * number of shares outstanding / EPS* number of shares outstanding

But market price * number of shares outstanding = market capitalisation and EPS * number of shares outstanding = net profit.

Therefore, PE now becomes equal to market capitalisation divided by net profit.

Now, calculating PE for the Nifty is pretty simple. First you calculate the market capitalisation of all 50 stocks of the Nifty and add them. Then you calculate the net profits of each of the 50 stocks making the Nifty and sum that up. The ratio of total market cap to total net profit is the Nifty PE. Nifty PE can be considered as the PE of Indian stock market as well.

#### What does Price-To-Book Ratio – P/B Ratio mean?

P/B ratio used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share.

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