The price-to-earnings ratio, or P/E, tells you how many rupees investors pay for each rupee of a company’s annual earnings. It is calculated by dividing the share price by the earnings per share. For an IPO, the P/E at the upper end of the price band is a quick way to judge whether the issue looks expensive or cheap. A P/E of 20 means you pay Rs 20 for every Re 1 of yearly profit. A high P/E can be justified when profits are expected to grow quickly or when the business is steady and high quality, while a low P/E may point to a cheap stock or to a business with poor prospects. The ratio is most useful when compared with listed peers in the same industry and with the company’s own growth rate, because sectors have different norms. Be careful about which earnings figure is used: trailing twelve months, the latest financial year, or an annualised partial period can give very different results, and one-off gains distort it. Companies with losses have no meaningful P/E. IPO Bulletin shows the P/E at the cap price with the earnings period used and a peer comparison.
Example: An IPO has a cap price of Rs 240 and an EPS of Rs 12. The P/E is 240 / 12 = 20 times. A listed peer trades at 28 times, which suggests the IPO is priced at a discount to that peer.