We will learn about P/E today, also called PE or PriceToEarnings

P/E = share price/EPS

(EPS we learned earlier — earnings per share)

What it means in layman’s language is how much money you need to invest in a company to get Rs1 as returns

if P/E = 20, it means if you invest Rs20 — that company will give you Re1 returns on investment

If P/E = 40, it means you need to invest Rs40 to get Re1 back.

So it is a measure of a company’s valuation. Lower PE means the firm is undervalued. A higher PE means it’s overvalued.