Price to earnings

Share price divided by earnings per share. The most quoted number in equity markets and the most misused.

A share at ₹1,200 with earnings of ₹12.30 trades at 97.6 times.

What the multiple actually contains is three things at once: how fast the company will grow, how good the returns on the money it reinvests are, and how certain both of those are. A high multiple is not expensive and a low one is not cheap; each is a statement about expectations, and the analyst's job is to decide whether the expectation is reasonable. DMart has traded in the range of 80 to 100 times for years and Costco around 50 times, which the market reads as decades of high-return growth ahead. Whether that turns out to be right is a separate question from whether the multiple is high.

The denominator is the weak point. Earnings can be depressed by a one-off charge, inflated by an asset sale, or meaningless for a company at the bottom of a cycle.

Never compare a multiple without knowing what is in the E.

A multiple is a sentence about the future.

The arithmetic behind that sentence is worth stating once. For a business in a steady state, the justified multiple rises with the growth rate, rises with the return earned on reinvested capital, and falls with the required return. Two of those three are properties of the business and the third is a property of the market. That is why a company earning 30% on capital deserves a higher multiple than one earning 12% at the same growth rate: it needs less reinvestment to grow, so more of its profit reaches the owner. A high multiple that cannot be explained by growth and returns is being paid for something else.