When we invest in shares, we should not just see the price – we should ask whether the price makes sense. Price should reflect performance, not excitement.
The PE ratio (Price to Earning ratio) tells us how much investors are willing to pay for ₹1 of a Company’s profit.
Formula :
PE=Share Price/ Earning Per Share(EPS)
Example: If a company’s current share price is ₹200 and its EPS is ₹10, PE = 200/10 = 20.
This means investors are paying ₹20 for every ₹1 the company earns.
But PE alone is not enough. A company growing fast can justify a higher PE. That’s where PEG ratio helps.
PEG = PE/Growth rate
Suppose, the company above has a PE of 20 and expected growth of 20%,
PEG = 20/20 = 1.
A PEG around 1 is often considered fairly valued.
If PEG is much above 1, the stock may be expensive compared to its growth.
If below 1, it may be undervalued.
PE shows the price tag. PEG shows whether the price matches the growth story.
Growth is usually based on:
●Company guidance
●Analyst projections
●Industry outlook
●Historical growth
So, invest wisely. Don’t buy just profit, buy profit with growth.
A high PE is not always bad. It may mean investors trust the company’s strong management, powerful brand, consistent past performance, or future growth potential.
Sometimes, the entire sector trades at a higher PE ( like technology or fmcg). So, a higher valuation is normal. Investors are willing to pay more for quality and stability.
On the other hand, a low PE does not automatically mean the stock is cheap. It may signal weak growth, poor management, declining profit or business risks.
So, valuation is a tricky balance – High PE can signal strength; low PE can signal stress. Always analyse both sides carefully.
Yes, the same caution applies to PEG ratio, too.
PEG looks smarter than PE because it includes growth. But it is not perfect.
A low PEG (<1) may look attractive. But ask:
●Is the growth estimate realistic?
●Is growth temporary?
●Is profit quality weak?
Sometimes growth is boosted by one-time gains – then PEG misleads.
A high PEG (>1) may look expensive. But:
●The company may have stable predictable growth
●It may operate in a high-quality sector.
●It may have strong cash flows and low debt.
Also remember:
PEG depends on future growth estimates, which can change:
So, yes, PEG adds intelligence to valuation, but it still depends on assumptions.
In simple terms:
PE shows today’s price. PEG tries to include tomorrow’s growth. But tomorrow is never fully certain. That’s why valuation is judgement, not just formula.
Disclaimer: The information provided in the blog is for educational and informational purposes only and should not be construed as financial advice. Readers are encouraged to consult a qualified financial advisor before making any financial decisions. All views expressed are personal.
