What P/E means

Imagine going to a fruit market to buy apples: each seller quotes a different price for what looks like the same fruit, and common sense says to prefer the stall offering the best value per apple.

P/E works similarly for stocks — it shows how many rupees investors pay for each rupee of a company’s earnings, helping compare “price per earning” across a basket of stocks. P/E stands for Price divided by Earnings per Share (EPS), so if a company trades at ₹100 and its EPS is ₹5, the P/E is 20 (100 ÷ 5). If Company A has a P/E of 20 and Company B has 30, then on P/E alone, A looks cheaper than B.

 

Why P/E often misleads

Back to the fruit market: apple prices vary by type and quality — imported apples won’t be priced like local ones, and a premium variety may look expensive but still be the better buy. In stocks, a high-quality or fast-growing business can command a higher P/E for good reason, while a weaker one may look “cheap” at a lower P/E.

Apples shouldn’t be compared to oranges; likewise, an IT company shouldn’t be compared to an FMCG company purely on P/E. Also, two companies can have the same P/E today, but if one is growing rapidly and the other is stagnant, the future value of the growing company can far outpace the other. That’s why P/E alone can be a blunt tool, especially for growth companies or across different sectors.

 

PEG: solving the growth blind spot

To adjust for growth, use PEG, which is P/E divided by expected earnings Growth. Consider two companies: Company A has P/E 30 and growth 40%, Company B has P/E 20 and growth 15%. On P/E alone, B appears cheaper; but on PEG:

 

Company A PEG = 30 ÷ 40 = 0.75

Company B PEG = 20 ÷ 15 ≈ 1.33

On PEG, Company A looks cheaper because the price is lower relative to its growth. As a rough rule of thumb, PEG below 1 often suggests better value, while PEG above 1 suggests the stock is relatively expensive for its growth. Treat this as a screening guideline, not a strict rule.

 

When PEG ties: add dividends with PEGY

What if PEGs are similar? Bring dividend yield into the picture. If multiple companies have a PEG near 1 but pay different dividends, the one with higher dividend yield may be more attractive. Peter Lynch popularized adding dividend yield to growth in the denominator, giving PE/(G + D), often called PEGY. This credit both growth and cash returned to shareholders.

 

PEGY example

Given:

Company A: P/E 25, Growth 20%, Dividend 5% → PEGY = 25 ÷ (20 + 5) = 1.00

Company B: P/E 20, Growth 24%, Dividend 1% → PEGY = 20 ÷ (25 +1) = 0.80

Company C: P/E 30, Growth 28%, Dividend 2% → PEGY = 30 ÷ (28 + 2) = 1.00

Company B comes out cheapest on PEGY because, even with a tiny dividend, its higher growth makes the “price per unit of total return” lowest. PEGY simply adds both parts of return — growth and dividend — and checks how much is being paid for that combined benefit. In short: if PEGY is lower, value is better; here, Company B offers the best value.

 

Trailing vs forward P/E: finish with the right lens

Trailing P/E uses the last 12 months of actual earnings (what just happened). It is objective but may misrepresent companies whose earnings are temporarily depressed or spiking.

Forward P/E uses forecast earnings for the next 12 months (what might happen). It aligns better with growth expectations but depends on the quality of estimates and may be too optimistic or conservative.

 

Practical takeaways

Start with P/E for a quick sense of “price per rupee of earnings” within the same sector and similar business models.

Use PEG to scale price by growth so fast growers aren’t unfairly penalized by a high P/E.

Use PEGY (PE/(G + D)) when dividends are meaningful to credit both growth and cash payouts.

Cross-check with both trailing and forward P/E to balance what just happened and what’s likely next.

Treat these ratios as screens; always sanity-check the inputs: growth realism, dividend sustainability, business quality, and balance-sheet strength.

 

Conclusion

P/E is a useful starting point, but it’s only the storefront sign. PEG brings in the speed of earnings growth, and PEGY adds the cash that lands in shareholders’ hands. Combine trailing P/E for the recent picture with forward P/E for expectations, and then use PEG and PEGY to compare price against what truly drives investor returns. Used in sequence — P/E → PEG → PEGY — these tools turn raw price tags into informed, actionable valuation insights.