Price-to-Earnings (P/E) vs PEG Ratio in Stock Market: A Simple Guide for Beginners

Is a high Price-to-Earnings (P/E) ratio good or bad? I don’t get it.

This stock looks cheap, but is it actually a good buy?

Everyone’s saying ‘PEG ratio’—should I be checking that too?

If any of these questions sound like yours, you’re not alone. 

Many first-time investors in India—whether they’re small business owners, freelancers, or salaried professionals—often feel overwhelmed by the numbers thrown around in the stock market world.

Terms like P/E and PEG ratios can sound like high-level finance, but once you break them down, they’re actually quite simple—and incredibly useful. This guide explains how to use these ratios smartly.

By the end, you’ll know how to spot if a stock is over-hyped, undervalued, or actually worth your money. Let’s take the confusion out of the numbers—and help you invest with confidence.

Why These Ratios Matter for You

These two (i.e. P/E ratio and PEG ratio) simple tools can help you:

• Judge if a stock is overpriced or a good deal
• Compare one company with another, even across industries
• Make smarter decisions about where to put your hard-earned money

What are P/E and PEG Ratios?

P/E ratio tells you how expensive a company’s shares are compared to how much profit it earns.

PEG ratio adjusts that by looking at how fast the company’s profits are expected to grow.

Even if you only invest ₹5,000 a month using a stock trading app, or plan to buy shares of listed companies, understanding these ratios helps you avoid common mistakes and chase real value—not hype.

Always check a stock’s PEG ratio if you hear it has a “low P/E”—cheap doesn’t always mean good!

What is the Price-to-Earnings (P/E) Ratio and How It Works

The Price-to-Earnings (P/E) ratio shows how much investors are willing to pay for ₹1 of a company’s earnings (or profit). It’s one of the most common ways to check whether a stock is fairly priced.

Why Should You Care?

Let’s say you’re a tuition teacher in Nagpur, and you want to invest in a listed company. Its share price is ₹1,600, and the company earns ₹80 per share in profit. 

That means:

P/E Ratio = ₹1,600 ÷ ₹80 = 20

So, investors are paying ₹20 for every ₹1 of profit the company makes. Is that good? Let’s find out.

How to Interpret the P/E Ratio

Here’s what a P/E ratio tells you:

• High P/E Ratio (e.g., 40 or more): Investors expect high future growth. Common in tech/startup stocks.
• Low P/E Ratio (e.g., 10 or less): Could be undervalued or might mean the company is in trouble.

Example:

In this table, the small tech firm looks expensive compared to the others—even though the price is low—because its profits are low.

There are two types of P/E Ratios:

• Trailing P/E: Based on profits from the past year (more reliable)
• Forward P/E: Based on future profit estimates (more risky)

Example:

Let’s say your mobile repair shop earns ₹1 lakh in profit a year, and someone offers ₹10 lakhs to buy it. That’s a P/E ratio of 10.

If someone offers ₹30 lakhs for the same business? The P/E ratio becomes 30.

The higher the price they’re willing to pay, the more they believe your shop will grow its profits.

Compare the P/E ratio only within the same industry.

Limitations of the P/E Ratio (And Common Mistakes to Avoid)

What’s the Problem? While the P/E ratio can be a helpful starting point, relying on it alone can be risky—especially if you’re a beginner trying to invest with limited capital. It doesn’t always show the full picture.

Let’s say you’re a mechanic in Bhopal thinking of investing ₹10,000 in a company just because its P/E is low. That could backfire if you haven’t looked at why it’s low.

Why Can the P/E Ratio Mislead You?

Here are the major blind spots:

• It Ignores Growth Potential: A company may look expensive (high P/E), but if its profits are expected to grow fast, it could be worth it. Example: A company with a P/E of 35 may seem costly—but if its profits are expected to grow 40% next year, it may be a smart buy.
• It Says Nothing About Debt: A company with a P/E of 5 might seem cheap—but if it’s drowning in loans, it could collapse anytime.
• Earnings Can Be Manipulated: P/E is based on accounting profits (not real cash). A company could show higher profits by selling assets or delaying expenses.
• Not Comparable Across Sectors: Comparing an IT company to a Paints manufacturing (FMCG) company using just P/E is like comparing a Bullet bike to a tractor—different engines, different uses!
• Assumes Past Performance Will Continue: Future earnings can change due to interest rates, government policy, or global events.

India’s inflation rate can impact how you interpret future earnings. In 2025, India’s inflation is projected around 5%—this affects business costs and profitability.

Example: Two Mobile Repair Shops

The second shop looks cheaper, but it might be riskier in the long run.

Always check other numbers like debt-to-equity ratio, cash flow, and industry average P/E before making a decision.

What is the PEG Ratio and Why It’s Smarter Than P/E Alone

PEG stands for Price/Earnings to Growth ratio.

It takes the regular P/E ratio and divides it by the company’s expected annual profit growth (in percentage). This tells you if the price you’re paying today is worth it given how fast the company is growing.

PEG Ratio = P/E Ratio ÷ Annual EPS Growth Rate

Why is PEG Better Than Just P/E?

Because it adds a crucial piece of the puzzle: future earnings growth.

Let’s say you’re a tuition teacher in Kolkata comparing two edtech companies. One looks expensive with a high P/E. But when you check the PEG, you realize it’s actually cheaper than the other when you factor in growth.

Example Table: Comparing Two Companies

Even though LearnQuick has a high P/E, its PEG of 0.9 shows better value because it’s growing fast. StudySoft may have a low P/E but hardly grows.

PEG under 1 is generally considered a good deal, and above 2 might be too expensive—especially in fast-moving sectors like tech or pharma.

Let’s say your tuition business earns ₹2 lakhs a year and someone offers ₹20 lakhs for it (P/E = 10). But your student base is growing by 30% every year!

PEG = 10 ÷ 30 = 0.33 — a great value for a fast-growing business.

Now compare this to a friend’s business with stable earnings but no growth. Even with a lower price, the growth-adjusted value is not as attractive.

When investing in tech stocks or startup IPOs, always check the PEG ratio—these businesses grow fast and P/E alone can be misleading.

Using P/E and PEG Together for Smarter Stock Selection

Think of P/E as checking the price tag, and PEG as checking what you’re really getting for that price. Used together, they give a well-rounded picture.

Just like a mechanic checks both fuel efficiency and engine power before buying a bike, you should check both ratios before buying a stock.

How to Use Them Together

• Start with P/E Ratio: Is the company priced higher or lower than others in the same sector?
• Then Check PEG Ratio: Does the company’s expected growth justify its price?
• Compare Across Companies: Compare both ratios among similar businesses, or use PEG to compare across industries.

Example: Comparing Two Stocks

Let’s say you’re a small workshop owner investing through a mobile app. You’re looking at two popular companies:

Although company B looks expensive at first glance (P/E of 55!), its growth-adjusted PEG shows it could be a better deal for the future.

Investors looking for long-term wealth creation often prioritize PEG, while those looking for stable income or dividends focus more on P/E and other factors.

Practical Steps for Indian Beginners

Here’s how a small investor like you can use this approach:

• Choose a Sector You Understand
• List 3–5 Companies
• Compare P/E and PEG Ratios – See which ones are undervalued or fairly valued based on growth.
• Dig Deeper – Look at debt, cash flow, and management quality.
• Avoid Extremes – If a company’s P/E or PEG is too low or too high, ask: Why?

A low PEG ratio doesn’t always mean a “buy”—the growth estimates may be overly optimistic. Always check who made the forecast.

How to Apply P/E and PEG Ratios in Real-World Investing

You’ve learned what P/E and PEG mean. But how do you actually use them to find good stocks? Whether you’re a Kirana store owner in Jaipur or a freelance designer in Pune, this step-by-step process will help you invest smarter—even with just ₹1,000 per month.

Step-by-Step Application Guide

• Start with Sector Comparison: First, compare P/E ratios among companies in the same industry.
• Spot Outliers: If one company has a much lower or higher P/E than others, find out why. Is it undervalued? Or in trouble?
• Use PEG to Check Growth Potential: If the company has a high P/E, PEG tells you whether it’s still worth it.
• Factor in Life Cycle: New companies may have high P/Es but great growth. Older, stable companies may have low PEG but steady income.
• Check Economic Conditions: During times of low interest rates, investors pay more (high P/E). In high interest-rate times, valuations shrink.

Example: A Small Investor’s Approach

Imagine you’re a home-based sari seller in Indore. You’ve saved ₹5,000 to invest monthly.

You compare two textile stocks:

Here, the company Y looks expensive, but its growth justifies it. If you want long-term wealth, it might be the better pick—if you’re okay with some volatility.

Some Indian sectors (like FMCG or utilities) usually have low PEG ratios but offer regular dividends. Others, like fintech or pharma, may have higher PEGs due to growth.

Quick Pointers Before You Invest

When choosing stocks, combine P/E, PEG, debt levels, and cash flow to get a complete picture—not just one shiny number.

What Every Beginner Should Remember

By now, you’ve mastered the basics of P/E and PEG ratios. Here’s a quick refresher:

Both are powerful tools—but only when used together, and along with other financial checks like debt and cash flow.

How to Use P/E and PEG in Your Stock Picks

• Start with P/E: Is the stock priced fairly compared to others in its industry?
• Check the PEG: Is the company’s future growth good enough to justify the current price?
• Compare Across Sectors (using PEG): Especially useful when choosing between a bank and a tech company, for example.
• Investigate Further: High or low P/E or PEG values are just clues—dig deeper before investing.
• Think Long-Term: Avoid jumping in and out. Choose quality stocks that match your goals.

For the Curious: What Else to Learn?

• How to read a balance sheet (to spot debt and cash flow)
• What is dividend yield and why it matters
• How to evaluate a company’s moat (its unique edge over competitors)
• Fundamental Analysis 
• Technical Analysis 
• Financial statements

Don’t rush into stocks because someone else said they’re “booming.” Learn the basics, trust the process, and stay consistent.

Conclusion

You’ve now understood two of the most powerful tools in stock investing—P/E and PEG ratios. These aren’t just numbers. They are insights that show you what’s really happening behind a company’s price tag.

You don’t need to be a finance expert or have ₹5 lakhs lying around. Even with ₹1,000 per month, you can begin your journey toward financial independence.

Think of your investments like running a small business: research your product (stock), check the price, measure the growth, and plan for the future. That’s how wealth is built.

Frequently Asked Questions About P/E and PEG Ratios for Indian Beginners

This FAQ section is here to help you feel more confident by answering some of the most common beginner questions in simple, relatable language.

Let’s clear up the confusion—one honest, helpful answer at a time.

What is the P/E ratio, and why do people keep talking about it?

The P/E (Price-to-Earnings) ratio tells you how much investors are paying for ₹1 of a company’s profit.

For example, if a company’s share costs ₹200 and its profit per share (EPS) is ₹10, the P/E ratio is 20. That means people are paying ₹20 for every ₹1 the company earns.

It’s popular because it helps you see if a stock is expensive or fairly priced compared to others in the same industry. But remember: a low P/E isn’t always good, and a high P/E isn’t always bad—it depends on the company’s future potential.

What is the PEG ratio, and how is it different from P/E?

The PEG ratio adds a layer of clarity by adjusting the P/E based on how fast the company’s earnings are expected to grow.

PEG stands for Price/Earnings to Growth. It’s calculated by dividing the P/E ratio by the company’s projected growth rate. For example, if a stock has a P/E of 30 and its profits are expected to grow by 20% annually, the PEG is 1.5.

While P/E only shows the “price,” PEG tells you whether the price is fair given the company’s growth speed. A PEG below 1 often signals a good value.

Is a low P/E ratio always a good sign?

Not necessarily. A low P/E ratio might mean the stock is undervalued—but it can also be a warning sign.

For example, if a company has a low P/E of 5, it might be in financial trouble, losing market share, or loaded with debt. That’s why smart investors don’t rely only on P/E. They look at other details too—like the company’s debt, growth prospects, and how it’s doing compared to similar companies.

Think of it like buying a used bike. A low price could be a great deal—or it could mean there’s a problem with the engine.

How do I know if a PEG ratio is good or bad?

As a general rule:

• PEG under 1 = potentially undervalued (good for growth investors)
• PEG between 1 and 2 = fairly priced
• PEG over 2 = possibly overvalued

But context matters. 

For example, a fast-growing tech company might have a higher PEG but still be attractive if you believe in its future. On the other hand, a steady performer might have a PEG above 1 but offer stability and regular dividends.

Always compare within the same industry or based on your goals—like long-term growth vs. steady income.