P/E and Its Cousins

P/E — Price to Earnings — is the most quoted number in markets, and the least understood. Decoded: it's simply how many rupees you pay today for each ₹1 of the company's yearly profit. A P/E of 30 = you pay ₹30 for ₹1 of annual earnings. If profits never grew, you'd wait 30 years to earn your money back.

So why would anyone pay 30, 50, 80 times earnings? One word: growth. If profits double in a few years, today's expensive-looking price becomes cheap in hindsight. A high P/E is the market saying "we expect big growth"; a low P/E says "we expect little" — or "we see danger." That last part is crucial: a low P/E is not automatically a bargain. Sometimes the market has correctly smelled a dying business, and the "cheap" price is a trap (investors call this a value trap).

The cousins, decoded:

P/B — Price to Book: price compared to the company's net worth on paper ("book value" = the equity from Chapter 3). Most useful for banks and financial companies, whose assets are money. Less meaningful for a software firm whose real assets — brands, code, people — barely appear on the balance sheet.

EV/EBITDA: sounds terrifying, isn't. EV (enterprise value) = what it would cost to buy the whole company, including taking on its debt. EBITDA = profit before interest, tax, and depreciation — a rough proxy for raw operating cash generation. The ratio compares the full purchase price to raw earning power — handy when comparing companies carrying very different debt loads, which plain P/E quietly ignores.

The golden rule for all price tags: compare within the same industry, and against the company's own history. A P/E of 25 might be expensive for a steel company and cheap for a dominant consumer brand. A number without context isn't information — it's noise.