## Price-to-Earnings (PE) Ratio in Investment Decision-Making

When the stock market is volatile and speculative opportunities arise, many investors look at various stocks to determine their true value. One widely accepted method among value investors (Value Investor) and financial experts is the **PE ratio** or **Price per Earnings ratio**, which helps illustrate the perceived unfairness of current stock prices.

## Understanding the PE Ratio Simply

**What is the PE ratio?** At its core, the PE ratio shows **how many baht an investor must pay to earn 1 baht of profit from a company**. Put another way, **if the company maintains its profit level indefinitely, how many years will it take for the investor to recover the investment?**

The calculation formula for the PE ratio is straightforward: **PE Ratio = Stock Price ÷ Earnings Per Share (EPS)**

## Components of the PE Ratio

This equation involves two key factors:

**Current Stock Price (Price)** is the price at which investors can buy or sell the stock in the market. The lower the price, the lower the PE ratio, indicating the stock is inexpensive and the payback period is shorter.

**Earnings Per Share (Earning Per Share - EPS)** is calculated by dividing the company's net profit over a year by the total number of shares. A high EPS indicates strong revenue-generating ability. Even if the stock price is high, the PE ratio may still be low because the denominator is large.

## Example of PE Ratio Calculation

Suppose an investor buys a stock at 50 baht, and the company just announced an EPS of 5 baht.

PE Ratio = 50 ÷ 5 = **10 times**

This means, if the company maintains this profit level annually, the investor will recover the investment in 10 years, after which they start earning net profit.

## Forward PE vs Trailing PE

In practice, there are two methods to calculate the PE ratio depending on the data used:

**Forward P/E (Forward P/E)**

Forward P/E uses projected earnings for the next year or several years ahead. The advantage is that it can forecast future trends by assessing whether the company will earn more or less.

However, the limitation of Forward P/E is that companies may underestimate future earnings to make actual performance appear better, causing stock prices to rise. Additionally, different analysts may have varying estimates, leading to confusion.

**Trailing P/E (Trailing P/E)**

Trailing P/E is calculated based on actual earnings over the past 12 months. Since it uses real data, it is a moderately reliable indicator and can be calculated quickly.

The downside is that Trailing P/E cannot reflect future changes. If a company faces a crisis or a fundamental event, the trailing P/E may still show outdated information.

## What Does a Low PE Ratio Mean?

**A low PE ratio** may indicate that the stock is currently undervalued and that the investor can recover their investment in a shorter period. However, a low PE does not always mean the stock is good; sometimes, it reflects market concerns about the company's future prospects.

## Limitations of Using the PE Ratio

Although the PE ratio is a useful tool, it has important limitations:

**EPS is not constant**

An investor buys a stock at 50 baht with an EPS of 5 baht, resulting in a PE of 10. Initially, they might expect to recover their investment in 10 years. But if the company expands its production or enters new markets, EPS could increase to 10 baht, reducing the PE to 5, and shortening the payback period to just 5 years.

Conversely, if the company suffers losses or faces trade barriers, EPS might drop to 2.5 baht, causing the PE to rise to 20, extending the payback period to 20 years.

**Industry differences**

Some industries have slow profit realization, such as banking and utilities. Others, like technology, may have high PE ratios due to growth potential. Comparing PE ratios across different sectors can lead to incorrect conclusions.

**Does not consider risk**

The PE ratio does not reflect the risk associated with investing in a particular company. Stocks with low PE but high risk require additional analysis, such as debt-to-equity ratio, liquidity, and management quality.

## Making the Most of the PE Ratio

The PE ratio is most useful when comparing stocks within the same industry or against the overall market average. For example, if one stock has a PE of 12 while the industry average is 18, that stock might be undervalued relative to its peers.

After deciding based on the PE ratio, investors should further study income quality, profit stability, and cost structure of the company.

## Summary

To find undervalued stocks, the **PE ratio** is a helpful tool to assess whether the price is reasonable. However, it should not be relied upon solely. Successful investors often combine PE analysis with financial statement review, industry trend evaluation, and news monitoring. Using multiple strategies together is the key to making smart investment decisions.