A ₹100 Stock Can Be Expensive. A ₹10,000 Stock Can Be CheapA ₹100 Stock Can Be the Most Expensive Thing on the Exchange. A ₹10,000 Stock Can Be a Bargain.
Stock price means absolutely nothing in isolation. This is one of the most common and most expensive misconceptions in retail investing.
"That stock is too expensive at ₹10,000."
"This stock at ₹50 is cheap — there is so much room to grow!"
These sentences are heard every day in trading communities. And they reveal a fundamental misunderstanding that costs retail investors lakhs every year. The price of a stock is not its value. It is just the number someone last paid for one share.
The Proof: Why Price Means Nothing Without Context
Let us compare three companies:
Company A — Stock price: ₹50
Earnings per share (EPS): ₹0.50
P/E ratio: 100
Interpretation: You are paying ₹100 for every ₹1 of annual earnings. This is extraordinarily expensive.
Company B — Stock price: ₹10,000
Earnings per share (EPS): ₹1,000
P/E ratio: 10
Interpretation: You are paying ₹10 for every ₹1 of annual earnings. This is reasonably priced.
Company C — Stock price: ₹500
Earnings per share (EPS): ₹100
P/E ratio: 5
Interpretation: You are paying ₹5 for every ₹1 of annual earnings. This could be a bargain — or a value trap (a company cheap for good reason).
Understanding the P/E Ratio Properly
The P/E ratio tells you: how many years of current earnings would it take to recover your investment price?
P/E of 10 = 10 years to recover (at current earnings, no growth assumed)
P/E of 50 = 50 years to recover
P/E of 100 = 100 years to recover
A P/E of 100 can be justified only if you believe the company's earnings will grow explosively over the next decade — so the future earnings look much better than today's. This is where the trap lies: you are not just buying current earnings. You are betting on a future earnings story.
If that story does not play out, the P/E contracts back to normal (15–25 for Indian markets) and the stock falls dramatically.
The Smarter Ratio: PEG (Price-Earnings-to-Growth)
The P/E ratio has a flaw — it does not account for growth rate. A company growing earnings at 30% per year deserves a higher P/E than one growing at 5%.
PEG = P/E ÷ Earnings Growth Rate
PEG below 1.0 = potentially undervalued relative to its growth
PEG of 1.0 = fairly valued
PEG above 2.0 = potentially overvalued — you are paying too much for the growth expected
Warren Buffett's preferred valuation combines earnings quality, growth rate, and return on equity — not just the price.
The Value Trap: Why Low P/E Does Not Always Mean Buy
Some stocks are cheap because they deserve to be cheap:
Declining industry (video rental stores, certain textile companies)
Chronic debt problems that eat all earnings
Management with a history of capital misallocation
Regulatory headwinds that structurally reduce future earnings
Always ask: WHY is this P/E low? If the answer is a temporary problem that will be resolved, it is an opportunity. If the answer is structural decline, it is a trap.
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