P/E ratio or the Price / Earnings ratio is the ratio of the stock price to its EPS. From a more macro perspective, P/E ratio can also be defined as under:
P/E Ratio = .or.
Both the above formulas amount to one of the same things. There are some sectors that command a higher P/E ratio. E.g. in the Indian context FMCG companies and pharma companies command much higher P/E ratios. On the other hand, there are sectors like PSU banks, metals, and utilities that command low P/E ratios. So what exactly are the factors that influence P/E ratio? While we can look at that in a detailed discussion, suffice to say that sectors typically have a major impact on valuations. Some sectors like FMCG tend to get much better P/E valuations compared to infrastructure or steel.