Learn · Valuation
Reading the Nifty P/E ratio
The price-to-earnings ratio is the most quoted measure of whether the market is cheap or expensive. It is simple to state, and easy to misread.
What it is
The P/E ratio is price divided by earnings. For Nifty 50, NSE divides the market value of the fifty companies by their combined profit over the last four quarters.
A P/E of 20 means investors pay ₹20 for every ₹1 of yearly profit. Turn it upside down and you get the earnings yield: 5% in this case, which can be set beside the interest on a deposit or a bond.
The current figure, with price-to-book and dividend yield, is on Nifty P/E ratio today.
Trailing and forward
NSE publishes the trailing P/E, based on profits already reported. Brokers often quote the forward P/E, based on analysts' forecasts for the coming year.
Because profits usually grow, the forward figure is lower. Neither is wrong, but they cannot be mixed. A headline saying Nifty trades at 19 times and another saying 22 times may both be right.
The change in April 2021
This is the trap in every long P/E chart of Nifty. Until March 2021 NSE worked the ratio out on standalone earnings: each company's own profit, without its subsidiaries. From April 2021 it uses consolidated earnings, which include them.
Consolidated profits are larger. Overnight, with no change in prices, Nifty's published P/E fell from about 40 to about 33.
So a P/E of 22 today is not comparable with a P/E of 22 in 2015. Any honest comparison keeps the two periods apart. Schema ranks each day only against earlier days on the same basis.
What cheap and dear have meant
A P/E is cheap or dear only against something: the index's own history, other markets, or interest rates.
Valuation says little about the next few months. Expensive markets can become more expensive, and cheap ones cheaper. It has said more about returns over the following years.
Schema put that to the test: is the Nifty cheap?
Other measures beside it
- Price to book (P/B) compares price with companies' net worth. It suits banks and other lenders, whose earnings swing with provisions.
- Dividend yield is the yearly dividend as a share of price. It tends to be high when the market is cheap.
- Mid- and small-cap premium: how much more is paid for a rupee of small-company profit than for Nifty's. Wide premiums have been a sign of froth.
Questions people ask
What is a good PE ratio for Nifty 50?
No single level is good. Compare the current P/E with its range since April 2021, when NSE began using consolidated earnings, and with interest rates.
Why is Nifty PE lower after 2021?
NSE switched from standalone to consolidated earnings on 31 March 2021. Consolidated profits include subsidiaries and are larger, so the ratio is lower for the same price.
Is a low Nifty PE a buy signal?
It shows the market is cheaper against profits than usual. That has mattered for returns over years more than over months, and profits themselves can fall.
Where does NSE publish the Nifty PE ratio?
In its daily index files, with price-to-book and dividend yield for every NSE index.
Keep reading
Research and information, not investment advice. Historical patterns describe the past and do not promise returns.