The Price-to-Earnings (P/E) ratio is the most widely quoted valuation metric in stock market investing. When applied to an upcoming IPO, it tells you how much money investors are paying for every ₹1 of profit the company generates.

1. What is the P/E Ratio?

The formula is straightforward: P/E Ratio = Issue Price per Share / Earnings Per Share (EPS). For example, if an IPO share is priced at ₹300 and the company earned an EPS of ₹10 over the past year, the company is asking for a P/E multiple of 30.

2. How to Calculate an IPO's P/E Ratio

Open the DRHP or RHP prospectus and locate the restated EPS under Summary Financial Information. Divide the upper cap price by the post-issue diluted EPS to determine the forward multiple.

Valuation and Bidding Demand

Institutional subscription multiples provide an objective gauge of whether market participants consider issue valuation fair. Track QIB data on the live bidding demand and subscription tracker.

3. Comparing with Industry Average & Competitors

A P/E of 40 is neither good nor bad in isolation. In the IT services sector, 40 might be expensive, while in FMCG or specialty chemicals, 40 might represent a bargain. Always compare the IPO's P/E with direct listed competitors on BSE and NSE.

4. When P/E Ratio Fails (And What to Use Instead)

The P/E ratio cannot evaluate loss-making tech startups with negative EPS. For such companies, analysts use EV/EBITDA or Price-to-Sales (P/S) ratios. Check market expectations on our upcoming IPO GMP page.