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How PE is built, why a low PE isn't always cheap, and what to compare it with
Published by The Retail Trader · AUG 09, 2026 · Features
The PE ratio is written everywhere and misused almost everywhere. 'PE is 12, so it's cheap' — this one line has ruined a lot of portfolios.
PE means price divided by earnings per share. In other words: how many times a year's earnings of the company you are paying for one share of it.
A PE of 20 roughly means that, at today's earnings, it would take 20 years to get your money back — if earnings stay the same. That 'if' is the whole story.
The market often gives a company a low PE because it thinks the company's earnings will fall. That is what is called a 'value trap': today's PE is low, next year earnings drop, and the PE goes up on its own without the price moving.
So the first question is not what the PE is. The first question is why the PE is what it is.
PE alone is useless. It is compared with three things:
• The company's own history — whether the company today is above or below its normal 5 or 10-year range.
• Other companies in the same industry — comparing a bank's PE with an FMCG company's is pointless. Different business, different structure.
• Growth — it is normal for a fast-growing company to have a higher PE. To look at this, a measure like PEG was created, which weighs PE against growth.
• Interest rates — when rates are low everything looks expensive, and that isn't wrong.
Trailing PE is built on the actual earnings of the last 12 months. Forward PE on an estimate for the coming year. The first is true but old, the second is fresh but an estimate.
When someone says 'PE is only 15', ask — trailing or forward, and if forward, whose estimate.
A company that is making a loss has no PE. In cyclical companies PE works in reverse — in the best year earnings are at their peak and PE looks lowest, and that is exactly the most dangerous time.
So PE is an opening question, not the final answer. It tells you what the market expects from this business — and the work after that is to see whether that expectation is reasonable.
This article is for educational purposes only — it is not a buy or sell recommendation, makes no claim of guaranteed returns, and is not advice. Rules, rates and mechanics are changed from time to time by the exchanges, SEBI and RBI, so verify every number yourself with your broker or an official source.