Vinay

How to Effectively use "PE & PEG Ratio" 

I came across a stock trading at a PE of 60. It looked so expensive. I thought, "Who in their mind would buy this?"  

Meanwhile, another stock was trading at PE 12. Cheap, right? I thought I had found a hidden gem.  

Fast forward five years...  

- The "expensive" stock had grown 10x. 

- The "cheap" stock was still struggling at the same level.  

That’s when I learned a painful truth—PE ratio alone is useless.  

Let me show you what I learned. 👇

1. The PE Ratio Trap 

PE (Price-to-Earnings) Ratio = Stock Price / Earnings Per Share (EPS)  

It tells us how much investors are willing to pay for ₹1 of a company's earnings.  

Example:  

A stock trading at ₹100 with an EPS of ₹10 has a PE of 10 (₹100/₹10).  

Most people assume:  

Low PE = Cheap stock 
High PE = Expensive stock 

I did too. And I was wrong.

Here’s why: 

- Low PE means undervaluation: 

Some stocks trade at a low PE because they have no growth, bad management, or declining business.  

- High PE means overvaluation: 

Great businesses with consistent earnings growth always trade at a high PE.  

- PE alone is enough to judge a stock: 

PE ignores growth. A stock with a high PE but strong earnings growth can still be a bargain.

2. The Game-Changer: PEG Ratio 

Imagine you’re buying a car.  

One car costs ₹5 lakh and gives 20 km/l mileage. 

Another costs ₹8 lakh but gives 40 km/l mileage.  

Which one is truly “cheaper”?  

This is exactly what PEG Ratio does—it adjusts for growth.  

PEG (Price-to-Earnings Growth) = PE Ratio / EPS Growth Rate (%)  

Example:  

- A stock with PE 30 and earnings growth of 40% has PEG 0.75 → Undervalued  

-A stock with PE 20 and earnings growth of 5% has PEG 4 → Overvalued  

A stock with PE 30 can be cheaper than a stock with PE 20—if it has strong growth.

3. Where Can We Find Earnings Growth Data? 

👉 http://Screener.in 

– Go to the Profit &amp; Loss section and check the EPS 

👉  Company Annual Reports – EPS growth data can be found in the financial statements.  

Without earnings growth, PE is meaningless.

Now let's look at an example of how a stock with high pe moved.  

Apar Industries  

Low PE & PEG → Strong Growth Phase  

In the early stages (left side of the chart), the stock had a PE of ~29.4 and PEG of 0.6, indicating undervaluation relative to growth. 

As expected, the stock rallied significantly after this phase.  

Rising PE & PEG → Maturing Growth

Then as the PE increase and along with PEG ratio goes above 1.5 it becomes a critical area to look at. Because Valuation starts to get expensive and any Red flags in earnings can cause price fall.

Logically also we understand that the Base is higher now and company needs to do very good to maintain high growth rate to keep PEG lower.

Final Thoughts: 

Most people focus only on PE and miss the bigger picture. 

Growth is the key.  

A high PE stock with strong earnings growth can be a great investment. 

A low PE stock with no growth can be a trap.  

- Check PEG, not just PE 
- Find consistent EPS growth 
- Focus on quality businesses  

Next time you analyze a stock, don’t ask, "Is the PE low or high?" 

Ask, "Is the growth strong enough to justify it?"  

That’s where real wealth is created.

Note : Alternate way to do the Same is through Forward PE.

Check  for Forward PE👉 https://x.com/ItsVinay01/status/1857265597383332330

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Disclaimer: This thread is for educational purposes only, not financial advice. Always do your own research!