Key Ratios
~4 min read
Price-to-Earnings (P/E) Ratio
The P/E Ratio: The Most Popular Valuation Metric
The Price-to-Earnings (P/E) ratio is the most widely used metric for evaluating whether a stock is cheap or expensive. It tells you how much investors are willing to pay for each shilling of the company's earnings.
The Formula
P/E Ratio = Share Price / Earnings Per Share (EPS)
For example, if Safaricom's share price is KES 30 and its EPS is KES 1.50, the P/E ratio is 20. This means investors are paying KES 20 for every KES 1 of annual earnings.
Interpreting the P/E Ratio
- High P/E (above 20) — Investors expect strong future growth, or the stock may be overvalued. Growth companies like Safaricom often trade at higher P/E ratios because investors expect their earnings to increase significantly.
- Low P/E (below 10) — The stock may be undervalued, or the market expects earnings to decline. Some NSE-listed companies in struggling sectors trade at low P/Es.
- Moderate P/E (10-20) — Often indicates fair value, depending on the sector and growth prospects.
Comparing P/E Ratios on the NSE
The P/E ratio is most useful when comparing companies within the same sector:
- Compare Equity Group's P/E to KCB's P/E and Co-op Bank's P/E to see which banking stock the market values most highly.
- Comparing Safaricom's P/E to a bank's P/E is less meaningful because they operate in different industries with different growth profiles.
Limitations
- Negative earnings — The P/E ratio does not work for companies that are making losses.
- One-time items — Unusual gains or losses can distort earnings and therefore the P/E ratio.
- Different industries — Each sector has its own typical P/E range. Do not compare across sectors blindly.