Oct 13 (Lagos) - The price to earnings (P/E) ratio is often used as a major indicator for picking a stock or not picking one. Some investors use it as a sole measure in making their decision while others tend to include a wider range of ratio/metrics.
Price to earnings ratio is the current price of a stock divided by its earnings per share. It tells you how much you are paying for a company's current earnings. So if the ratio is 10, it is telling you that it will take 10 years of earnings to justify the current stock price.
So should you be worried when a company is flashing a P/E ratio above 30? it depends on the growth the company is showing. If a Company is a tech leader showing top line growth of more than 40% year on year, a higher P/E ratio is very well justified.
However if you are looking at a legacy business, showing 10% growth in top line, its P/E ratio should not worry you as long as it is below 15 times.
You also need to keep in mind that huge top line growth from currency devaluation does not count. You need to discount that.
So if you are looking into investing in a power generation company or a hotel business and you are looking at a P/E ratio of above 100 times, you need to understand what you are paying for. It is obvious that the stock has been manipulated by perhaps lack of supply from its owners or artificial demand has been created. At the same time, a high P/E ratio is a new sector a ground breaking company should not dismay you from purchasing the stock.
Once the P/E ratio goes above 30 times for any stock, you really need to justify your reason for purchasing that stock.
That you are willing to pay 30 years of earnings to own that stock today - that is something you should be able to justify to yourself before you buy the stock.
You should also use other metrics apart from the P/E ratio like a Company's debt ratio, its ROE and how is the debt affecting the ROE. A high debt company can have a high ROE which is not what you want to see. You want to see a high ROE without high debt ratio.
reporting for easykobo.com on Monday, Oct 13 2025 from Lagos, Nigeria