What is P/E ratio?

P/E ratio (price to earning ratio) 

Formula for P/E is share price devide by EPS (earning per share)
Let's know about EPS
EPS(Earing Per Share) is total income divide by total outstanding share.


You can find out total income in balance sheet of company. And total outstanding shares is equal to market cap divide by current share price.

For Ex-If you want to calculate XYZ company's total outstanding shares which has a market cap of 5000 cr. and current share price is 120 Rs.
then

Total out standing shares=5000 crore/120= 41.66 crore


You can find EPS on exchange site or other websites like money control and investing.com.

But what EPS defines - what is total earning per every outstanding share of company. That means if company will distribute all the profits to shareholders then what is the earning per share.


Now let's  back to P/E ratio:
Let's take an example 
If you buy a share of XYZ company at the price of 100 Rs and earning per share after a year is 5 Rs then XYZ has a P/E ratio = 100/5 =20
This is define that it will take 20 years to double your investment..
Or in simple way
Every 20Rs you earn 1Rs per year.

But there are many myths about PE RATIO 
Like people think the stock is undervalued if the PE is low but it may be low because of weak fundamentals of stock or less interest of investors or lack of future potential of company.

Also if PE is high then people think that stock is overvalued but it may be high because strong fundamentals and storng future potential and higher interest of investors.
Value of PE are very form sector to sector. Some sector has relatively higher PE so there is a ideal way to know about PE is compare PE ratio of stock to their Sectoral PE. 
Let's take example
consolidated PE is 25.63 and Industry PE is 27.36 that means ICICI BANK's PE is relatively lower than Sectoral (industry)PE
*In fundamental analysis there are many different factors like future potential, group of promoters are important so only PE cannot define the potential of company*

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