## PE Ratio: A Tool Every Stock Investor Must Know

When the stock market declines and becomes volatile, many investors start looking for opportunities to enter positions. But the question is, are current prices truly cheap or expensive? When will the investment yield returns? To answer these questions scientifically, the most widely used tool is **PE or PE Ratio**, which is a key indicator favored by (Value Investors).

## What is the PE Ratio and Why Is It Important?

The PE Ratio (Price to Earnings Ratio) is a ratio comparing a stock's price to its net earnings per share. This figure tells us that **if the company maintains steady profits, how many years it will take to recover the investment and start making a profit**. The lower the PE, the cheaper the stock and the shorter the payback period.

## How to Calculate the PE Ratio is Very Simple

The formula is **PE = Stock Price (Price) ÷ Earnings Per Share (EPS)**.

There are two factors to understand in this formula:

**Stock Price (Price)**: The current trading price of the stock. If earnings per share remain constant, a lower stock price results in a lower PE, meaning a quicker return on investment.

**Earnings Per Share (EPS)**: The total profit of the company for the year divided by the total number of shares. If EPS is high, even if you buy the stock at a high price, the PE may still be low because the denominator is larger. This indicates the company's high profitability.

**Example**: If you buy a stock at 5 baht and the company's EPS is 0.5 baht, the PE will be 10, meaning it will take 10 years to recover the investment, with annual profits of 0.5 baht, totaling 5 baht. After 10 years, all profits will be the net benefit for shareholders.

## Trailing P/E vs. Forward P/E: Which Is More Important?

**Trailing P/E (PE backward)**: Uses actual profit data from the past 12 months. It is reliable because it is based on real data. Many investors prefer this method because it doesn't rely on estimates. However, the downside is that past performance does not necessarily predict future performance.

**Forward P/E (PE forward)**: Uses projected future earnings. This helps to see how much profit the company might make in the coming year. But it has limitations: companies may underestimate or overestimate future profits, and external analysts' forecasts may differ from actual results, leading to confusion.

Both methods have pros and cons. Investors should use both to compare and make informed decisions.

## Limitations to Be Aware of When Using the PE Ratio

The PE Ratio is a useful tool but not perfect. EPS is not constant; as the company grows or faces issues, EPS will change, and so will the PE.

**Example**: Suppose you buy a stock at PE = 10 (price 5 baht, EPS 0.5 baht), expecting to wait 10 years. But if the company successfully expands its market, increasing EPS to 1 baht, the PE drops to 5. Now, the payback period is only 5 years. You are lucky. Conversely, if the company faces disputes and EPS drops to 0.25 baht, the PE rises to 20, and you will need to wait 20 years to recover your investment.

Therefore, the PE Ratio is best used in conjunction with other analyses, such as financial health, business outlook, and external factors. Relying solely on the PE number provides an incomplete picture.

## Summary: PE Ratio is a Helpful Tool, Not a Magic Bullet

Successful investors do not rely on a single tool. The PE Ratio helps compare how cheap or expensive stocks are on a standard basis, but it should be used alongside other analytical methods to reduce investment errors. When you truly understand the PE Ratio, you can better time your investments and confidently select undervalued, high-quality stocks for your portfolio.