The Price-to-Earnings (P/E) Ratio is a fundamental analysis tool used to value a company by measuring its current share price relative to its per-share earnings.
It tells investors how much they're paying for one rupee of a company's annual earnings. The P/E ratio is widely used by investors on the Pakistan Stock Exchange (PSX) to gauge whether a stock is overvalued or undervalued.
The P/E Ratio Explained
Calculation
The basic P/E ratio is calculated using this formula:
Current Market Price (P): The trading price of the stock on the PSX.
Earnings per Share (EPS) (E): The company's net profit (earnings) divided by the number of outstanding shares. This is typically based on the last 12 months of earnings (Trailing P/E) or projected future earnings (Forward P/E).
Interpretation
The resulting number is expressed as a multiple (e.g., 8x, 15x). If a PSX stock has a P/E of 10, it means investors are willing to pay Rs. 10 for every Rs. 1 of the company's annual earnings.
Using P/E to Identify Under/Overvalued Stocks in the PSX
A stock's P/E ratio is generally considered high or low only when compared to a relevant benchmark. A single P/E ratio in isolation is not enough to make a solid investment decision.
1. Relative Valuation: Comparing to Peers and the KSE-100
This is the most crucial step for the PSX:
Undervalued Stocks (Relatively Low P/E): If a company's P/E ratio is significantly lower than the average P/E of its direct competitors in the same sector (e.g., comparing one textile company's P/E to another's) or the average P/E of the KSE-100 Index (which is often relatively low, historically around 6x to 12x, but check current market conditions), it may be undervalued.
If the average P/E for the Commercial Banking sector is 8x, but Bank 'A' has a P/E of 5x, it could suggest Bank 'A' is undervalued. However, investors must investigate why the P/E is low—it could be a value trap (i.e., a company with poor future growth prospects or hidden risks).
Overvalued Stocks (Relatively High P/E): If a company's P/E ratio is significantly higher than its industry average or the KSE-100 P/E, it may be overvalued.
If a Technology stock has a P/E of 30x when the KSE-100 P/E is 10x, it implies investors have high growth expectations for that company. If the company fails to deliver on this expected rapid growth, the stock price—and its P/E—may drop dramatically.
2. Historical Valuation
Compare the stock's current P/E to its own historical P/E range over the last 5 to 10 years.
If the current P/E is near the low end of its historical range, the stock may be undervalued.
If the current P/E is near the high end of its historical range, the stock may be overvalued.
Where to Find the Price-to-Earnings (P/E) Ratio for Pakistan Stock Exchange (PSX) Stocks?
Finding reliable and current PE ratios for PSX companies should be simple.
At StockIntel, we compile all the critical valuation data you need for your investment decisions on the Pakistan Stock Exchange. We make it easy to track the Price-to-Earnings ratio for any PSX stock.
How to check the P/E Ratio:
For a Quick View: Use our powerful PSX Screener to instantly compare the TTM P/E and other ratios across all listed companies.
For Detailed Analysis: Go to an individual PSX stock page on our site. Here, you'll find a complete breakdown including the live P/E, as well as charts illustrating the historical PE ratio over time.
Where to Find the Price-to-Earnings (P/E) Ratio for Pakistan Stock Exchange (PSX) indices like KSE 100?
Finding reliable and current PE ratios for KSE 100 index and other indices is straightforward.
At StockIntel, we calculate Price-to-Earnings (P/E) Ratio of KSE 100 and other indices of the PSX. You can find them on the indices page.