Is P/E Still Relevant? Rethinking the Market’s Most Quoted Ratio

For decades, the P/E ratio has been the market’s favourite yardstick to assess the attractiveness of an investment—but is it still relevant in today’s dynamic landscape? Abhishek Wani explores whether this century-old metric is timeless wisdom or a deceptive trap in modern investing [EasyDNNnews:PaidContentStart]

Introduction
For nearly a century, the Price-to-Earnings ratio, or simply P/E, has reigned as the market’s most quoted ratio. From Wall Street to Dalal Street, it has long been the shorthand for valuing companies, the starting point for retail investors, and a comfort zone for analysts. A stock at a P/E of 10 is ‘cheap,’ while one at 100 is ‘expensive’—or so the conventional wisdom goes. 

But markets rarely obey such simplicity. Over time, investors have discovered that P/E can be both an illuminating lens and a deceptive trap. The young investor who bought Asian Paints at a P/E of 30 in 2007 became a millionaire. The one who bought PSU banks at a P/E of 7 is still waiting for a turnaround. Numbers without context mislead, and context without discipline is dangerous. That paradox has reignited a critical debate: is the P/E ratio still relevant, or has it outlived its usefulness in today’s dynamic markets? 

The P/E ratio rose to prominence in the early 20th century, when investors searched for simple ways to compare stock prices with underlying earnings power. At its core, the ratio answers one basic question: how many rupees is an investor willing to pay today for one rupee of a company’s current earnings? For value-investing pioneers like Benjamin Graham, low P/E stocks were often hidden gems waiting to be discovered. This thinking carried forward into India as retail investors embraced P/E as a quick screening tool. Brokerage reports, market debates, and television commentary still obsess over the multiple. Even today, questions like ‘But isn’t the stock too expensive at 70 times earnings?’ remain common in market conversations. 

Yet, as India’s equity markets matured and global capital poured in, the cracks in P/E’s dominance began to show. 
NIFTY 50 P/E over last 10 years

The Illusion of Cheapness
On paper, a low P/E looks irresistible. But history is full of painful reminders that cheapness is not value. Consider the fate of India’s public sector banks through the 2010s. State Bank of India, Punjab National Bank, and Bank of Baroda traded for years at P/Es of 5 to 8—deep discounts to private-sector peers like HDFC or Kotak Mahindra. Analysts pitched them as bargains waiting to be unlocked. 

The reality was different. Mounting non-performing assets, weak governance, and capital constraints eroded shareholder wealth. A decade later, investors discovered that ‘cheap’ PSU banks weren’t bargains at all but wealth destroyers. 

The story repeated in infrastructure. After the 2008 boom, many infrastructure companies looked attractive with singledigit P/Es. But balance sheets loaded with debt and stalled projects turned them into value traps. The supposed ‘margin of safety’ implied by a low P/E ratio offered no protection. 

The lesson is simple: a low P/E often signals risk, not opportunity. 

When Expensive Isn’t Expensive
At the other extreme, some of India’s greatest wealth creators have always looked ‘expensive’ by P/E standards. Asian Paints has traded at a premium—often between 50 and 60 times earnings— for decades. Many retail investors balked at paying such lofty multiples for a paint company. Yet, the business’s predictable growth, strong moats, and consistent compounding rewarded investors with over 12-fold returns in the past decade alone. 

Or take Avenue Supermarts (DMart). When it listed in 2017, critics scoffed at its nearly 100 P/E. But those who looked past the headline number and focused instead on its execution excellence and 25 per cent+ annual revenue growth saw their wealth multiply sixfold in less than a decade. Even in banking, HDFC Bank—long considered ‘expensive’ at 20–25 times earnings—rewarded investors with annualised returns of nearly 18 per cent for over 25 years. 

The Great Debate: Is P/E Obsolete or Simply Misunderstood? 

View 1: P/E is Overrated, Cash Flows Rule
For the first camp, P/E is little more than a distraction. Saurabh Mukherjea, founder of Marcellus Investment Managers, has been one of the most vocal critics of using P/E in isolation. ‘The P/E ratio by itself tells you absolutely nothing about a stock,’ he argues, noting that true valuation is the present value of all expected free cash flows. 

In his framework, two factors dominate: the rate of growth in free cash flows, driven by a company’s competitive advantages, and the sustainability of those cash flows, determined by capital allocation and governance quality. If both remain strong, a stock trading at 100x earnings may in fact be cheap. As he quipped in one interview, ‘If a business compounds free cash at 25 per cent annually for 25 years, its fair value P/E could be as high as 250x.’ 

The evidence is compelling. Nestlé India rewarded investors with an 18 per cent CAGR between 2011 and 2020—even if they had bought at its 52-week high each year. Asian Paints has never traded ‘cheap’ by P/E standards, yet has built generational wealth. Avenue Supermarts listed at nearly 100x earnings in 2017 and has since multiplied sixfold. Globally, Amazon looked absurd at 200x for years, but believers in its free cash flow engine became billionaires. 

Critics label this philosophy BAAP—Buy At Any Price. Mukherjea rejects the caricature: ‘It’s not about buying at any price, but at any value. Once you identify a company that compounds cash flows consistently, it doesn’t matter if you pay 20 per cent more or less. Over the long term, the stock price compounds at the same pace as the underlying cash flows. 

The message is clear: ignore P/E, follow the cash flows. 

View 2: P/E Still Matters — Context is King
The other camp doesn’t dismiss growth but warns against blind faith in high multiples. Sunil Singhania of Abakkus Asset Manager argues that growth must justify valuation. ‘There cannot be an unlimited P/E multiple for a company,’ he cautions. Paying up for quality is fine, but chasing stocks at any price is dangerous, especially in a world where consumer tastes shift rapidly and business models get disrupted overnight. 

History supports his caution. Zomato and Paytm came to market at sky-high valuations, only to lose 40–60 per cent of their value as growth slowed and profitability lagged. Tesla at one point traded above 1,000x earnings, but late entrants in 2021 saw their holdings collapse nearly 70 per cent before stabilizing. Even closer home, PSU banks trading at ‘cheap’ P/Es of 5–8 turned into wealth destroyers because their low valuations masked poor governance and fragile balance sheets. 

For Singhania, the real risk isn’t paying 30- or 40-times earnings—it’s paying that multiple when growth visibility is absent. ‘High P/E without high growth is unsustainable. A 30 per cent growth rate may justify a P/E of 40–50, but if growth slows to 10 per cent, such multiples collapse,’ he notes. 

His approach can be summarized as: growth plus discipline. P/E may be incomplete, but it remains a vital guardrail against over-optimism. 

Bridging the Divide: Compounding vs. Prudence
At its core, the debate is less about numbers and more about investment philosophy. 

- View 1 (Mukherjea): Think 15–20 years, focus on monopolistic franchises, and don’t sweat near-term multiples. P/E is noise if the business compounds reliably.
- View 2 (Singhania): Think 3–7 years, balance optimism with discipline, and never overpay for hope. P/E is not perfect, but it is a necessary check. 

The clash mirrors the global divide between growth investing and value investing, between paying up for ‘consistent compounders’ and demanding valuation discipline. 

Charlie Munger, Warren Buffett’s legendary partner, perhaps captured the middle ground best: ‘It’s not necessarily crazy that good companies sell at way higher P/E multiples than they used to.’ With interest rates near zero for much of the last decade, investors worldwide were willing to pay more for dependable growth. But as the cost of capital rises again, the tolerance for sky-high P/Es is bound to be tested. 

The Middle Ground: Beyond P/E
What both camps ultimately agree on is that P/E cannot be looked at in isolation. Investors need a multidimensional lens that accounts for: 

- Free cash flow generation and reinvestment requirements
- Durability of competitive advantages
- Governance and capital allocation quality
- Growth visibility and macroeconomic context 

This is where metrics like PEG (P/E ÷ Growth), Price-to-Book for banks, ROCE for industrials, and Free Cash Flow Yield for consumer companies come in. A PEG of 1 may suggest fair value, while a PEG of 3–4 warns of excess optimism. 

In other words: P/E isn’t dead. But it must evolve. 

If Not P/E, Then What? The Future of Valuation 

The Evolution of Market Metrics
The first part of this story showed how P/E often misleads, rewarding high-multiple quality franchises and punishing ‘cheap’ laggards. The second part highlighted the debate between cash-flow purists and valuation disciplinarians. The natural next step is to ask: if P/E is incomplete, what should investors use instead? 

Over the past two decades, both Indian and global investors have gradually shifted towards multi-metric frameworks. P/E remains a quick reference point, but increasingly it is supplemented—or even replaced—by deeper valuation tools. 

PEG and the Growth-Adjusted Lens
One of the simplest extensions of P/E is the PEG ratio (P/E ÷ Growth). A PEG of 1 is considered ‘fair’, balancing valuation with growth prospects. Infosys in the 1990s traded at 60x P/E with 60 per cent growth—a PEG of 1, suggesting it was not overvalued. By contrast, Avenue Supermarts trades at over 110x earnings today with ~22 per cent growth, a PEG close to 5. This doesn’t mean DMart is doomed, but it forces investors to question whether growth is sufficient to justify such multiples. PEG is hardly foolproof, but it introduces growth into the conversation, making it a step beyond raw P/E. 

EV/EBITDA and Sector Nuances
Banks, NBFCs, and financials are typically valued using Price-to-Book (P/B) rather than P/E, because book value and return on equity matter more than near-term earnings. 

Similarly, capital-intensive businesses like steel or cement are often compared on EV/EBITDA (Enterprise Value to Operating Profits), which neutralises the effects of leverage and depreciation. For consumer and technology companies, investors increasingly prefer Free Cash Flow Yield (FCF/Market Cap.)—a direct measure of how much cash the business returns relative to its valuation. 

The lesson? There is no universal ratio. Each sector demands its own lens. 

Quality and Intangibles: Beyond Numbers
Perhaps the biggest limitation of P/E is that it ignores intangibles: governance, durability, brand strength, network effects, and capital allocation discipline. These ‘soft’ factors, though hard to quantify, often separate compounding machines from value traps. Asian Paints’ moat lies not just in paints but in its distribution network and ability to allocate capital into adjacencies. HDFC Bank’s discipline in risk management justifies its premium multiples. These are invisible to P/E screens. 

Going forward, valuation frameworks will need to embed these qualitative factors more systematically—something even institutional investors are grappling with. 

Technology and the AI Era
Another frontier is the use of AI-driven valuation models, which analyse massive datasets—from consumer sentiment and alternative data to supply-chain signals—to project earnings and cash flows. For the next generation of investors, valuation may be less about single ratios and more about probabilityweighted scenarios. As investing gets more data-driven, the elegance of a one-line metric like P/E may simply not capture the complexity of modern markets. 

The Balanced Approach
What emerges across all these perspectives is not the death of P/E, but its demotion. It is no longer the king of valuation ratios, but one among many tools. For slow-growing, established businesses, P/E still works as a quick filter. For high-quality or high-growth franchises, investors must go deeper—into free cash flows, competitive moats, and growth durability. 

As one fund manager quipped: ‘P/E tells you what the market thinks today. Cash flows tell you what the business will do tomorrow. The art of investing is in bridging the two. 

The Final Word
So, has P/E become outdated? Not entirely. It remains a universal language of markets, but its message is incomplete without translation. In the hands of disciplined investors, P/E can still guide. In the hands of lazy ones, it misleads. The future of investing, then, is not about abandoning P/E, but about rethinking it as part of a broader toolkit—one that blends numbers with narratives, ratios with realities, and price with potential. 

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