Lesson 5 of 7 · 6 min read
How to understand valuation
P/E ratios, peer comparison, and what 'expensive' really means.
A great company can be a poor investment if you pay too much for it. Valuation asks: how much am I paying for what this business earns?
The P/E ratio
Price-to-Earnings (P/E) = share price ÷ earnings per share. A P/E of 30 means you are paying ₹30 for every ₹1 of annual profit.
Compare with similar companies
Offer documents list 'listed industry peers' in the 'Basis for Offer Price' section. If peers trade around 38× and the IPO is priced at 28×, it is cheaper on this one measure. Then ask why: lower growth? Lower margins? More risk?
Limitations to remember
- P/E is meaningless for loss-making companies.
- Peers chosen by the company may not be truly comparable.
- EPS shown in the offer document is usually before the new shares are issued; after dilution, the effective P/E is higher.
- One year's earnings may be unusually high or low.
Key takeaways
- P/E tells you how much you pay for each rupee of profit.
- Compare with genuinely similar companies and note the differences.
- Always check the EPS basis and whether earnings are positive.
Terms in this lesson
Educational content only. Not investment advice.