loader2
Partner With Us NRI
Download iLearn App

Download the ICICIdirect iLearn app

Helping you invest with confidence

Open Free Demat Account Online with ICICIDIRECT

What is Nifty P/E ratio, and how to calculate it?

24 Sep 2022 0 COMMENT

Introduction

The price-to-earnings ratio of a company is a metric that compares the market price of a stock to its earnings per share. It is also called the earnings multiple or the price multiple.

Essentially, the P/E ratio of a company tells us how much money an investor in the market is willing to pay for one rupee of the company’s earnings.

Calculating the P/E ratio of a company is simple. You need to divide the company’s current market price by its Earnings per share (EPS). 

Did you know that you can calculate the P/E ratio of the Nifty 50 index as well? It is useful to understand how the index is positioned—whether it is overvalued or undervalued. 

What is the Nifty 50 Price-to-Earnings Ratio? 

The Nifty 50 P/E ratio is a metric that tells you how the index is valued. Historically, the Nifty 50 P/E ratio has averaged around 20. Any value above 25 indicates that the index is costly. It may be best to book profits and enter again when the market falls in such a situation. 

When the index goes above 25, the market may be headed for a correction. For instance, before the 2008 market crash, the P/E ratio of Nifty 50 was around 28. From there, it took a steep crash. Knowing when to exit the market using the P/E ratio could be a good strategy for an intelligent investor.

If the P/E ratio of Nifty 50 is below 15, the index is undervalued. You can expect the stocks in the index to bounce back shortly. This may be a good time to buy shares in the index and book profit later. However, it doesn’t mean it will crash or bounce immediately on reaching the threshold level. So Nifty may also continue to trade at a lower or higher P/E ratio for an extended period. Besides, these threshold levels like 25 or 15 will not always hold good; the market may also trade at a higher and lower P/E ratio.

How to calculate Nifty 50 P/E Ratio? 

According to market capitalisation, the top 50 Indian companies make up the Nifty 50 index. When calculating the P/E of an individual company, you can divide the company’s market price by its EPS. 

To calculate the P/E ratio of the Nifty 50 index, you need to take the sum of market capitalisation of all 50 companies and divide it by the sum of their profit after tax. This will give you the P/E ratio of the index. As mentioned before, the index is stable as long as the P/E ratio of Nifty 50 is within the range. If the ratio moves up or down, you can change your investment strategy according to it. 

Conclusion

The Nifty 50 P/E ratio is a metric used to understand the value of the Nifty 50 index. It is similar to computing the P/E ratio of a company, but instead of individual companies, it tells the health of the entire index. You can also compare the P/E ratio of individual companies against the Nifty 50 P/E ratio to understand how a company is performing compared to its index constituents.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.