Capital Market Chronicles – Episode 133: UNDERSTANDING PRICE TO EARNINGS RATIO (P/E RATIO) (Part III)

 📉 Capital Market Chronicles – Episode 133: UNDERSTANDING PRICE TO EARNINGS RATIO (P/E RATIO) (Part III)

🎭 Title: “Trailing, Forward and the Perils of the P/E Party”

Welcome back to our never-ending soap opera of stock market metrics, where numbers don’t lie—but they can put on heavy makeup.

In today’s episode, we conclude our three-part thriller on the Price to Earnings Ratio, also known as P/E—Wall Street’s answer to “How much are you willing to pay for a rupee’s worth of dreams?”

🍾 Scene 1: Meet the Twins – Trailing & Forward P/E

Let’s face it. P/E is like the horoscope of stock valuation—some believe it blindly, others take it with a pinch of salt and a bucket of quarterly results.

🥷 Trailing P/E (a.k.a. The Historian):

This one is based on the EPS of the past 12 months. It reflects what has already happened—like an ex who keeps reminding you how great things used to be.
“Look, I made ₹20 per share last year!”
Sure, but what about next year when you're spending more on AI than actual earnings?

🔮 Forward P/E (a.k.a. The Fortune Teller):

This one looks into the future earnings—yes, those unicorns galloping over rainbow projections. It says:
“Just wait till you see next year! I’m gonna crush it!”
But like every New Year gym resolution, it comes with optimism… and a 40% chance of disappointment.

🚨 Scene 2: When P/E Becomes P/U (Price to Unreliability)

Now that we know P/E can look both ways—back and ahead—let’s not get starry-eyed. There’s a dark side. Like every Bollywood hero, P/E has baggage:

1. Accounting Shenanigans:

One-time gains, asset sales, or write-offs can pump up or drag down EPS. This means your P/E might be based on a fluke.
“My EPS was great this quarter!”
Because you sold your office chairs on OLX?

2. Industry Mix-ups:

Comparing a tech start-up with a cement company using P/E is like comparing a drone to a brick.
Different industries, different lifespans, different risk appetites.
So, don’t mix apples with algorithm-based cloud services.

3. Sentiment Swings:

Markets are emotional beings. Fear, greed, caffeine levels—they all play a role.
Sometimes P/E is less about performance and more about vibes.
“Why is this stock trading at 80x P/E?”
Because investors believe it’ll become the next Tesla… in the banana exports industry.

📚 Final Chapter: Use, Don’t Worship

Yes, P/E is a handy metric. But it’s not a financial GPS. It’s more like your car’s speedometer—it tells you how fast you’re going, but not whether you’re heading towards Goa or a ditch.

Use it with other tools:

• P/B Ratio – Checks if the company is worth more dead (assets) than alive (earnings).

• Dividend Yield – Because who doesn’t love passive income?

• ROE – For measuring the efficiency of those equity rupees.

🎬 Curtain Call

So here’s the big finale:
P/E is helpful. But it’s not holy.
It’s a useful lens, not a magic mirror. Trailing or forward, high or low—each P/E tells a story. Just make sure it’s not fiction.

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