P/E Ratio Explained: How to Use It Smartly in Stock Valuations

Learn how to use the P/E ratio smartly in stock investing. Go beyond cheap vs expensive and understand growth, debt, sentiment & valuation.

A practical deep-dive into using the P/E ratio smartly — with real company examples, pitfalls to avoid, and key factors that drive valuations.

Table of Contents

1. Earnings Visibility
2. Growth Potential
3. Debt & Balance Sheet
4. Market Sentiment
5. Dividends
6. Interest Rates
7. Case Study: UltraTech vs Coal India
8. Why Not Rely Solely on P/E?
9. Relative P/E & Peer Comparison
10. Key Takeaways

📌 Earnings Visibility

Stable companies with predictable earnings command higher P/E. Example: Dixon Tech vs Tata Steel.

🚀 Growth Potential

High-growth companies are valued at a premium. Example: Varun Beverages (63% profit CAGR) vs NTPC (9%).

💰 Debt Matters

Heavy debt reduces valuation multiples. Example: InterGlobe Aviation (7x leverage, 33x P/E) vs Safari Industries (debt-free, 67x P/E).

📈 Market Sentiment Cycles

Sectors fall in & out of favour: 90s cement → 2000 IT → 2003-07 real estate → recent FMCG. P/E swings with sentiment (Infosys once 200x, now 22x).

💵 Dividends

Consistent payouts = premium P/E. Unsustainable payouts = red flag.

📉 Interest Rates

Low rates → higher P/E (cheap money, growth). High rates → lower P/E (expensive credit, slower growth).

🏢 Case Study: UltraTech vs Coal India

Company	P/E	Strengths	Weaknesses
UltraTech	52x	Strong growth, visibility	High valuation
Coal India	7x	High dividends	Weak growth visibility

⚠️ Don’t Rely Solely on P/E

P/E doesn’t work well for banks & insurers. Past averages don’t predict future multiples (TCS: 20x → 40x → back to 25x).

📊 Relative P/E & Peer Comparison

Compare vs industry median: - If leader trades near median despite better growth → undervalued. - If laggard trades at premium without edge → overvalued trap.

https://www.moneycontrol.com/explainers/personal-finanace/personal-finance-how-to-put-pe-ratio-to-use-in-analysing-stocks-article-13483803.html

💡 Key Takeaways

• P/E = expectations, not just price tag.
• Visibility, growth, debt, dividends, sentiment & rates shape P/E.
• Always use P/E in context of peers & fundamentals.

Next in the series: Price-to-Book Ratio (P/B) Explained
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Written by Larissa Fernand. Views are personal.