Price to Earnings (P/E) Ratio Explained for NEPSE Investors

In the Nepal Stock Exchange (NEPSE), the Price to Earnings (P/E) Ratio is one of the most commonly used and powerful valuation tools for investors. It shows how much investors are willing to pay for every rupee of a company’s earnings. In simpler terms, the P/E ratio reveals whether a stock is undervalued, fairly priced, or overvalued based on its profit-generating ability. Understanding this ratio helps Nepali investors compare companies, analyze market sentiment, and make smarter, fact-based investment decisions instead of emotional ones.

The P/E Ratio is calculated using a simple formula:

P/E Ratio = Market Price per Share ÷ Earnings per Share (EPS)

For example, if a company’s share is trading at Rs. 400 and its EPS is Rs. 20, then its P/E ratio is 20 (400 ÷ 20). This means investors are paying Rs. 20 for every rupee the company earns annually. A higher P/E usually means the market expects strong future growth, while a lower P/E can signal undervaluation or slower growth prospects.

In NEPSE, P/E ratios vary widely across sectors. Commercial banks often trade at moderate P/Es (10–20 range) due to stable earnings, while insurance and hydropower stocks may have higher or more volatile P/Es due to growth expectations or inconsistent profits. However, a high P/E doesn’t always mean overvalued — sometimes, investors pay more for quality companies with consistent earnings growth and strong fundamentals. Conversely, a low P/E might indicate undervaluation or potential risk if the company’s performance is weak.

Investors should also analyze Earnings Quality while using the P/E ratio. If the company’s EPS is inflated by one-time gains or accounting adjustments, the P/E may give a misleading picture. That’s why professional investors often compare Trailing P/E (based on past earnings) and Forward P/E (based on expected earnings) to understand future potential.

In fundamental analysis, P/E Ratio is most useful when compared among companies in the same industry. For example, if one hydropower stock has a P/E of 10 and another has 25, investors must ask — is the higher P/E justified by better growth, or is it simply market hype? Such comparisons make the P/E ratio a cornerstone of stock valuation and sectoral analysis in NEPSE.

According to Sandeep Kumar Chaudhary, Nepal’s most respected Technical and Fundamental Analyst and founder of the NepseTrading Training Institute, “P/E Ratio is not just a number — it’s a reflection of investor psychology. Understanding it helps you see what others believe about the company’s future.” With over 15 years of banking and capital market experience, and international training from Singapore and India, he teaches students to analyze P/E ratios contextually — linking them with EPS growth, sector trends, and overall market sentiment to identify fair value opportunities.