Which Stocks Are Worth Investing in? Does a High P/E Really Mean Overvalued?

What P/E Ratio Indicates a Good Time to Buy a Stock?

One of the most frequently cited metrics in stock analysis is the P/E Ratio, or Price-to-Earnings Ratio. This figure is often seen as a quick indicator to help investors decide whether a stock is "cheap" or "expensive" relative to the company's actual earnings.

Many investors automatically assume that a low P/E means the stock is undervalued, while a high P/E means it’s overvalued. However, the reality is not that straightforward. A stock with a high P/E might simply reflect the market’s expectations for strong future growth, while a stock with a low P/E could be masking underlying risks or business challenges that keep its price perpetually low.

Does a High P/E Ratio Really Mean the Stock Is Overvalued?

The P/E Ratio (Price-to-Earnings Ratio) is a financial metric that divides a company's stock price by its earnings per share (EPS). It helps investors gauge how the market is valuing a stock relative to the company’s actual earnings. Essentially, the P/E ratio tells us how much investors are willing to pay for every dollar of earnings the company generates.

How to Calculate the P/E Ratio

Before looking at the P/E Ratio of a stock, it’s important to first understand how to calculate EPS (Earnings Per Share)—which represents the company’s net profit per share.

EPS tells us how much net income a company earns for each outstanding share over a specific period, typically on an annual basis, though quarterly figures are sometimes used as well. The calculation is simple: take the company’s total net profit for the year and divide it by the total number of outstanding common shares.

For example:

Let’s say Company A reports a net profit of 100 million THB and has 20 million outstanding shares.
The EPS would be:

100 million THB ÷ 20 million shares = 5 THB per share

Once we have the EPS, we can easily calculate the P/E Ratio.

Assume the current stock price of Company A is 50 THB and its EPS is 5 THB per share.
The P/E Ratio would be:

50 ÷ 5 = 10 times

This means, in theory, if the company continues to earn at the same rate, it would take an investor about 10 years to recoup their investment through the company’s earnings.

Is a High or Low P/E Ratio Better?

The answer is—it depends on the context and the nature of the business.

• High P/E Ratio:

  • A high P/E ratio often suggests that the market expects the company to deliver strong future growth. Investors are willing to pay a premium for these expectations. This is common in sectors like technology or other growth stocks, where P/E ratios can easily range from 30 to 100 times or more.

  • However, if the P/E ratio becomes excessively high without the company’s earnings growth to support it, it could be a sign that the stock is overvalued and may carry significant risk if the market’s expectations fail to materialize.

• Low P/E Ratio:

  • A low P/E ratio might indicate that the stock is undervalued, overlooked, or facing challenges, leading investors to assign it a lower valuation. This is often seen in cyclical industries or companies with volatile earnings.

  • That said, low P/E stocks can also present opportunities for value investors, especially if the company’s fundamentals remain solid but the market has priced the stock too pessimistically.

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So, Does a High P/E Always Mean Overvalued?

The answer is—sometimes yes, but often no.
A high P/E ratio can indicate an overvalued stock in certain situations, but it’s not a universal rule. Investors should always look at the P/E ratio alongside other factors, such as EPS growth, the overall economic environment, the company’s competitive position, and how the stock compares to peers within the same industry.

For example:

• Many U.S. tech stocks trade at P/E ratios above 50 times, yet investors are still willing to pay a premium because these companies continue to deliver strong, consistent growth.

• Conversely, sectors like energy or banking may have P/E ratios below 10 times, but they might attract less investor interest due to slower growth prospects relative to the broader market.

Caution: Don't Rely on P/E Ratio Alone

Investors should avoid judging a stock’s valuation based solely on its P/E Ratio. It’s important to consider other fundamental factors and fully understand the company’s business model and industry dynamics. Remember, the P/E ratio is just an initial tool that reflects the market’s sentiment at a specific point in time—it doesn’t tell the whole story.

Note: This article is intended for preliminary educational purposes only and is not intended to provide investment guidance. Investors should conduct further research before making investment decisions.