P/E Ratio (Price-to-Earnings Ratio)
The Price-to-Earnings (P/E) ratio compares a company's current market share price to its annual Earnings Per Share, showing how much investors pay per rupee of profit.
Detailed Explanation
The P/E multiple is the most widely cited valuation metric in equity investing. It is calculated by dividing the stock's current trading price on NEPSE by its annualized Earnings Per Share (EPS). A lower P/E ratio indicates that the stock may be undervalued or that the company operates in a mature, low-growth sector. A high P/E ratio suggests that investors anticipate rapid future earnings growth—or that the stock has become unsustainably overvalued due to market speculation.
Why It Matters to You
A stock trading at NPR 200 with an EPS of NPR 5 has a P/E of 40x, making it twice as expensive as a stock trading at NPR 800 with an EPS of NPR 40 (P/E of 20x). P/E cuts through nominal price illusions.
Formula & Calculation
P/E Ratio = Current Market Price (CMP) / Annualized Earnings Per Share (EPS)
- CMP = Current traded price of the share on NEPSE
- EPS = Annualized net earnings per share
If a stock trades at NPR 450 and its annualized EPS is NPR 25, P/E = 450 / 25 = 18.0x.
Where It Is Commonly Used
- Stock screener filtering
- Sector comparative valuation
- Margin of safety analysis
- Historical benchmark comparisons
Key Advantages & Limitations
Key Advantages
- Fastest way to benchmark relative valuation
- Enables direct comparison across sector peers
- Universally recognized
Limitations & Risks
- Useless for loss-making companies (negative P/E)
- Does not account for company debt load
Common Misconceptions & Beginner Traps
A low P/E stock is always a guaranteed bargain.
A stock may have a low P/E because its business is deteriorating, facing legal liabilities, or suffering massive non-performing loans (the Value Trap).
Nepal Financial & Regulatory Context
NEPSE publishes official sector-wise P/E ratios in its daily market summaries. Historically, commercial banking P/E ranges between 12x and 22x across bull and bear cycles.
Real-World Practical Scenario
Comparing two commercial banks on NEPSE. Bank X: Price = NPR 360, EPS = NPR 24 → P/E = 360 / 24 = 15.0x. Bank Y: Price = NPR 280, EPS = NPR 10 → P/E = 280 / 10 = 28.0x. Outcome: Bank X is fundamentally cheaper despite having a higher nominal share price.
Investor chooses Bank X for better earnings yield and margin of safety.