Full lesson guide
How the idea works
P/E shows how many rupees investors pay per rupee of annual earnings attributable to ordinary shareholders. State whether the earnings are from the past year or a forecast. A higher multiple can reflect stronger expected growth, lower risk or temporarily depressed earnings. A negative earnings denominator generally makes the usual comparison unhelpful.
- Earnings per share
- Profit attributable to ordinary shareholders divided by the relevant share count.
- Normalized earnings
- An estimate of recurring profit after adjusting for unusual items.
Apply it to a decision
Fictional example · Investigate a low multiple at a listed manufacturer
A share trades at ₹480. Reported earnings are ₹40 per share, including a ₹10 per share one-off after-tax gain. Comparable peers trade at 15× normalized earnings.
Compare the reported and normalized P/E with peers.
- Set up the problem. Reported P/E is ₹480 ÷ ₹40 = 12×.
- Work it out. Remove the gain to get ₹30 recurring earnings per share. Normalized P/E is ₹480 ÷ ₹30 = 16×.
- Read the result. The share looks cheaper on reported earnings and dearer after adjustment. Check whether the peers and earnings periods are comparable.
Before you use it
Use the same reporting period and a consistent treatment of one-off gains.
Common mistake. Comparing one firm’s forecast earnings with another firm’s past earnings mixes periods.