P/E Ratio: A tool to measure the value of stocks that investors need to know

When the market is volatile, many investors look for stocks with intrinsic value. But the follow-up question is: Is the current price fair? Should I buy now or not? If I buy, when will I see a profit?

Finding answers to these questions requires reliable analytical tools, and P/E ratio is one of the most popular tools among professional investors and value investors (Value Investor)

P/E Ratio and Price-to-Earnings Ratio: Basic Meanings

P/E Ratio or Price per Earning ratio can be understood just from its name—it is the ratio between the stock price and earnings. It indicates how many years you need to wait to recover your investment from the company’s profits, assuming the company’s profit remains the same each year.

The lower the P/E, the:

• Cheaper the stock price
• Shorter the payback period
• Faster profit realization

Calculating P/E: Formula and Key Factors

Calculating P/E is very simple—just divide the stock price by EPS:

P/E = Stock Price (Price) ÷ Earnings Per Share (Earning Per Share – EPS)

###Component 1: Stock Price (Price)

The lower the purchase price, the lower the P/E, signaling a potentially undervalued stock.

###Component 2: Earnings Per Share (EPS)

EPS is the net profit for the year divided by the total number of shares outstanding. This figure tells each shareholder how much profit they are entitled to per year.

If a company has high EPS:

• It demonstrates strong profitability
• Even if the stock price is high, P/E might still be low
• Shareholders can recover their investment faster

###Example Calculation

Suppose an investor buys a stock at 5 THB, and the stock has EPS = 0.5 THB

P/E = 5 ÷ 0.5 = 10 times

This means the investor needs to wait 10 years for the company to pay back 5 THB (break-even point). After that, the profits earned are net benefits.

Forward P/E and Trailing P/E: Key Differences

Investors often encounter two types of P/E, each with its own advantages and disadvantages.

(Forward P/E – Future Expectation P/E

Forward P/E uses the current stock price divided by estimated earnings for the next year

Advantages:

• Provides a future outlook of the company
• Suitable for investing in growing companies

Disadvantages:

• Based on analyst estimates, which can be mistaken
• The company might underestimate future earnings to make projections look more optimistic later

)Trailing P/E – Historical Performance P/E

Trailing P/E uses the current stock price divided by actual earnings over the past 12 months

Advantages:

• Based on real data, not estimates
• Easy to calculate
• Many investors trust this more

Disadvantages:

• Past performance does not guarantee future results
• If significant events occur, Trailing P/E may reflect changes too slowly

Limitations Investors Should Know

Although P/E ratio is a useful tool, it is not a comprehensive analysis method.

(Issue 1: EPS is not a fixed number

EPS can change significantly when a company succeeds or fails.

Scenario 1 – Growth:

• Investor buys stock at P/E = 10
• The company expands production or exports
• EPS rises from 0.5 THB to 1 THB
• P/E drops to 5 times
• Payback period shortens from 10 years to 5 years

Scenario 2 – Problems:

• The company faces trade restrictions or damages
• EPS drops from 0.5 THB to 0.25 THB
• P/E rises to 20 times
• Payback period extends to 20 years

)Issue 2: P/E does not tell the whole story

Using only one tool cannot tell investors “it’s a good investment here.” Multiple indicators should be used, such as:

• Business stability
• Management quality
• And many others

How to Use P/E Effectively

Despite its limitations, P/E remains a valuable analytical tool:

1. Use P/E for screening – Find stocks with P/E below the industry average
2. Compare within the same sector – Compare P/E among stocks in the same industry
3. Combine with other metrics – Use P/E alongside PBV, Dividend Yield, growth rate, etc.
4. Monitor changes – Observe whether P/E increases or decreases over time

Summary

Investors aiming for success in the stock market should understand what P/E ratio is and use it appropriately. During uncertain markets, P/E is a tool to identify stocks with intrinsic value.

Although the PE ratio has limitations, combining it with other analyses can help investors avoid mistakes and confidently hold stocks with genuine value.