The PE ratio of a company is essentially the amount of money an investor will invest in a single stock of the company for ₹1 of its earnings. The formula to calculate a company’s price-to-earnings ratio is:
PE Ratio = (Current Share Price / Earnings Per Share)
For example, if a company has a PE Ratio of 30, this means that the investors are willing to pay ₹30 in the company’s share for ₹1 of its current earnings.
A high PE ratio suggests that the company is either overvalued or is on a growth trajectory and is expected to increase its revenue in the future.
On the other hand, a low PE ratio means that the shares of the company are undervalued due to certain risks associated with it. It may also mean that the company is not expected to perform well in the future.