Stock Market Basics · Lesson 10 of 14 · Updated October 2026 · 6 min read
A great company can be a bad investment if you pay too much for it. Valuation is how investors judge whether the price makes sense for what the business earns and owns.
In short: Market cap is the total value of a company’s shares. P/E compares the price with earnings. Use them to compare similar companies and to avoid overpaying, not as buy or sell signals.
Market capitalisation
Market cap = share price × total number of shares
Example: 10 crore shares at ₹500 = a market cap of ₹5,000 crore. That is what the market says the whole company is worth today. A ₹50 share is not “cheaper” than a ₹5,000 share; compare market caps and earnings instead.
P/E ratio (price to earnings)
P/E = share price ÷ earnings per share (EPS)
Example: A share trades at ₹500 and the company earned ₹25 per share over the last year. P/E = 20. You’re paying ₹20 for every ₹1 of yearly profit.
Reading a P/E
- Compare with similar companies in the same industry, not across industries.
- Compare with the company’s own history.
- A high P/E means the market expects strong growth. If the growth doesn’t come, the share can fall sharply.
- A low P/E can mean a bargain, or a business in trouble. Find out which.
P/B ratio (price to book)
P/B = share price ÷ book value per share (shareholders’ equity divided by shares). It’s most useful for banks and financial companies, whose assets are mostly money.
Putting it together
| Company A | Company B | |
|---|---|---|
| Share price | ₹500 | ₹500 |
| EPS | ₹25 | ₹10 |
| P/E | 20 | 50 |
| Profit growth (3 years) | 10% a year | 30% a year |
Company B looks expensive, but it is growing three times faster. Neither is automatically the better buy. Valuation always comes back to the question: how much will this company earn in the future, and am I paying a fair price for that?
Common questions
What’s a “good” P/E?
There isn’t one number. It depends on the industry, growth, debt and how steady the profits are.
Where do I find P/E?
Most broker apps and stock screeners show it. Check whether it uses the last 12 months’ earnings.
Next lesson: Tax on Shares in India: STCG, LTCG, Dividends and Losses → · See all 14 stock market lessons
Education, not investment advice. Figures and rules as of October 2026; check the latest before you act.