PE or P/E or Price multiple or Earnings multiple explained in simple terms

Hello Everyone,

PE or P/E or Price multiple or Earnings multiple all refers to the same thing.

This is one of the important metrics that is used when looking at a stock.

To understand PE, we need to understand what P and E(Earnings per share) mean.

P is easy to understand, It's the price of the given stock or we can take LTP(Last traded price).

EPS(Earnings per share):- Firstly, It is calculated at the end of the fiscal year after the given organization’s financials are declared. 

Let's work with an example, if ABC Ltd has an outstanding share of 100000 at the end of the given fiscal year it has made a profit of 200000 for the same fiscal year then the earnings per share are as shown below. 

EPS formula:- 200000(Total Net Profit)/100000(Total Outstanding shares) = 2 per share

NB:- The above formula can get complex in the real world but the basic concept is the same.

This means, for each share, the shareholder holds in his portfolio, his earnings are 2 bucks. FYI, S/he will not get these earnings whatsoever unless the company declares dividends which will be a portion of the net profits.

If you hold 100 shares in ABC Ltd then your earnings are 100 bucks * 2 = 200 bucks

Let's say that, ABC Ltd stock price is 100 at the end of the Fiscal year for easy math.

PE (Price to Earnings):- This is referred to as the price multiple or the earnings multiple depending on the context.

This indicates How much money(price) that market(buyers) are willing to pay to get 1 buck of earnings.

PE Formula =  Market value per share(100)  = 50

                                EPS(2)

If ABC Ltd is currently trading at a P/E multiple of 50x, It indicates that an investor is willing to pay 50 bucks for 1 buck of current earnings.

PE is a relative term, it needs to be compared with something else otherwise it has not much meaning to it. We can either compare it with the peer group company's PE or the Industry average PE.

Example:- On 07-Jan-2023 the PE of the INFOSYS, TCS and NIFTY IT are as shown below.

As you can see the PE of the TCS is more than the INFY and the NIFTY IT, What it means is TCS stock price on this date is overvalued(Or it's getting traded expensive price) compared to the Industry average and the INFY.

Instrument	PE
INFY	26.62
TCS	29.85
NIFTY IT	25.68

Hope the article made sense. Please comment below if you have liked the article or if you have any suggestions.