The stock market is full of numbers. Prices flash on the screen, charts move up and down, and investors often feel like they’re drowning in data. But sometimes, one number can cut through the noise and give you a surprisingly clear picture of what you’re really paying for. That number is the P/E ratio — short for Price-to-Earnings ratio.

At its simplest, the P/E ratio tells you how much investors are willing to pay for each taka of a company’s profit. It is calculated as:

P/E Ratio = Share Price ÷ Earnings Per Share (EPS)

If a company’s stock price is Tk 200 and its EPS is Tk 20, the P/E is 10. That means investors are paying Tk 10 for every Tk 1 of earnings.

It sounds straightforward — and it is — but the meaning of that number depends heavily on context. Let’s break it down, step by step, with real examples from Bangladesh and beyond.

Understanding the Market Average

Before judging any individual stock, it’s important to know what the overall market P/E looks like. Think of it as a neighborhood average price.

As of early 2025, the Dhaka Stock Exchange (DSE) was trading around 9.5 times earnings. That is low compared to developed markets like the US, where indices like the S&P 500 often trade above 20×. A low market P/E in Bangladesh reflects both opportunity and risk: investors here are cautious, liquidity is tighter, and many stocks are priced cheaply relative to profits.

If you come across a company with a P/E of 8 in this environment, it may be worth looking closer. If you see one at 18, you must ask why investors are paying such a big premium.

Local Examples: Square Pharma and BRAC Bank

Let’s ground this with real companies.

Square Pharmaceuticals, often considered the gold standard of DSE, has recently traded around 8–9× P/E. Its EPS has hovered around Tk 26–27, and it consistently pays dividends. In plain terms, you are paying about Tk 8–9 for each taka of Square’s earnings. For a market leader in pharmaceuticals with exports and a long history of stability, that is not expensive.

BRAC Bank, on the other hand, trades at roughly 9–10× P/E. Banks are a little different because investors also look at Price-to-Book (P/B) ratios and loan quality. But the P/E still matters — it shows that BRAC is priced slightly above the market average, which makes sense given its strong SME and retail banking franchises.

The comparison is useful. A pharma leader at 9× and a major bank at 10× both tell you that Bangladeshi blue chips are not priced at wild valuations. But if a small textile company is also trading at 10×, you would need to question whether it deserves the same multiple as Square Pharma or BRAC Bank.

Global Perspective

Now compare this to the giants abroad.

• Apple currently trades at around 32–35× earnings.
• Microsoft is even higher, around 38×.
• Nestlé, a steady global consumer brand, is priced closer to 18–20×.

Why are global companies so much more “expensive” than Bangladeshi ones? Part of the reason is growth and scale. Apple and Microsoft are seen as innovation powerhouses with billions in free cash flow and global dominance. Investors are willing to pay a premium for that reliability and growth.

For Bangladeshi investors, this comparison shows how conservative valuations at home really are. But it also reminds us that a high P/E is not automatically bad — sometimes it reflects genuine quality.

The Earnings Yield: Turning P/E Upside Down

One of the best ways to use the P/E ratio is to flip it around. Earnings Yield = 1 ÷ P/E.

If a stock is at 10× P/E, the earnings yield is 10%. That means, in theory, the company is generating 10% of its market value in annual earnings.

Now compare that to what you could earn risk-free. In March 2025, the 5-year Bangladesh Government Treasury Bond yielded about 11.36%. If you can earn over 11% without any equity risk, then a stock with an 8% earnings yield looks less attractive unless it can grow earnings significantly in the future.

This is why the P/E ratio cannot be looked at in isolation — it must be compared to alternatives like bonds.

When a Low P/E is a Trap

Investors love bargains, but not every low P/E is a good deal. Sometimes it’s a warning.

• Cyclical industries: A textile exporter may post strong earnings in a boom year, making the P/E look cheap. But when global demand slows, earnings collapse and the “cheap” stock suddenly looks expensive.
• Temporary boosts: Companies sometimes report inflated profits due to asset sales or accounting changes. The EPS is not sustainable, so the P/E is misleading.
• Governance issues: If investors don’t trust management, they will assign a low P/E no matter what the numbers say.

This is known as a value trap — the stock looks inexpensive, but the earnings don’t last.

When a High P/E is Justified

On the flip side, a high P/E can sometimes make sense.

• Strong brands: A company like Grameenphone has historically traded at a premium because of its market dominance.
• Sustained growth: Firms expanding into exports or digital services may deserve higher multiples because profits are expected to rise for years.

The key is to ask: Is the company earning the right to be expensive?

Trailing vs. Forward P/E

It’s also important to know which P/E you are looking at.

• Trailing P/E: Based on the past 12 months of earnings. Reliable, but backward-looking.
• Forward P/E: Based on forecasted earnings for the next year. Useful, but depends on estimates that may be wrong.

For BRAC Bank, the trailing P/E might be around 10×, but if analysts expect earnings to rise, the forward P/E could be closer to 8×. That difference matters — but only if the forecasts are realistic.

Sector Differences

A P/E must always be compared within its industry. Banks, pharma, insurance, and consumer goods all trade at different ranges. A bank at 10× may be fairly priced, but a high-growth consumer company at the same multiple may be a bargain.

For example, the average pharma sector P/E on the DSE is higher than the banking sector because pharma profits are considered more resilient. Context is everything.

The Practical Checklist

So how can you use the P/E ratio in real life as a Bangladeshi investor? Here’s a simple process:

• Compare the company’s P/E to the market average (currently ~9.5×).
• Compare it to the sector average (pharma, banks, etc.).
• Look at both trailing and forward P/E.
• Flip it to see the earnings yield and compare it to bond yields.
• Ask whether earnings are sustainable or boosted by one-offs.
• Always cross-check with other fundamentals like cash flow, return on equity, and balance sheet strength.

Final Thoughts

The P/E ratio is not a magic formula. It won’t tell you exactly which stock will rise tomorrow. But it is one of the best starting points for asking the right questions.

Is this company cheap for a reason, or is it a hidden gem? Is it expensive because investors are dreaming, or because it truly deserves a premium?

Used properly, the P/E ratio helps you avoid emotional decisions and focus on what really matters: how much you are paying for each taka of earnings.

In a market like Bangladesh, where stories and rumors often move faster than analysis, just pausing to calculate and interpret the P/E ratio can give you a huge advantage. It’s not about memorizing numbers — it’s about seeing the bigger picture.

So next time you look at a stock, don’t just ask, “What’s the price today?” Ask instead: “How many years of earnings am I paying for?” That small shift in mindset can make all the difference between speculation and smart investing.