What Is the P/E Ratio? From Earnings Basis to Industry Comparison

Fundai Education Team · October 13, 2026 · 8 min read

Follow the LABAN example to examine the earnings basis used in calculating P/E, and learn the limits of comparing a company's ratio with its industry.

Step one: what is the P/E ratio?

The answer to "what is the P/E ratio" is the price per share divided by the earnings per share on a specified basis. The price-to-earnings ratio is expressed in "times"; before interpreting it, check the period and the calculation method of the earnings in the denominator.

The answer to "what does the P/E ratio show" is the price the market pays for each rial of earnings per share. "What is P/E" and "what does the P/E ratio mean" have the same answer. P/E does not measure payback time or return.

To understand what the P/E ratio is in the stock market, open the income statement; a report of a company's revenues, expenses and profit or loss over a period. Issuers' reports can be reviewed on the Codal system. At Fundai we also display the income statement and earnings per share; read the period title and the type of financial statement before choosing the denominator.

Basic EPS equals net profit attributable to ordinary shareholders divided by the weighted average number of shares in the period. When noting down earnings per share, keep the "basic" label and the reporting period. Now the annual denominator of the example is clear; to read the twelve-month ratio, you need to check another basis.

Step Two: What Is P/E TTM and How Is Its Base Earnings Figure Built?

P/E TTM equals the day's closing price divided by earnings per share over the most recent twelve months. The answer to "what is the P/E TTM ratio" depends on the net profit of the last four reported quarters, not merely on the latest fiscal year. At Fundai, we calculate twelve-month earnings per share using the company's current number of shares.

Interim Codal reports are cumulative; directly adding the three-month, six-month and nine-month profits counts the profit of some quarters several times. To build a TTM figure, you must separate the quarters or use cumulative periods of equal length. The second method adds the previous fiscal year's profit to this year's cumulative profit and subtracts the profit of the same period last year.

In the explanation of TTM on Bourseiness, published on 1396/11/09, the basis of the ratio is described as the realized performance of the past twelve months. To carry out the calculation, all profits must be in the same unit. In the earnings-per-share formula below, net profit is entered in rials.

EPS TTM uses the current number of shares, whereas basic EPS depends on the weighted average number of shares in the period. Therefore, the difference between the two denominators relates both to the earnings period and to the basis of the share count.

Step 3: Is a High or Low P/E Better? What Does a Negative P/E Mean?

A low P/E alone is not a measure of a better stock; answering "is a high or low P/E ratio better" requires examining the denominator. With a positive price, a negative P/E results from negative earnings per share; a lower ratio with the same positive earnings only reflects a lower price.

To compare companies, examine the components of profit in the income statement. In cyclical industries, a temporary high profit at the peak of a boom, or the recognition of non-recurring profits, can temporarily inflate the denominator and make the P/E look misleadingly low. A change in net profit alone does not establish the cause of the change or whether the profit is repeatable.

The answer to "what does a negative P/E mean on the stock exchange" depends on the sign of the denominator. A negative P/E cannot be considered better than positive ratios merely because the number is smaller. With a positive price, distinguish between the following situations.

Distinguish between "a zero displayed for the ratio" and "zero earnings per share"; check the displayed status against the profit data. Once the sign and the basis are clear, it is time to choose an appropriate comparison. Past data does not guarantee the future.

Step 4: What is the sector P/E, and what conditions apply when comparing with the industry?

The industry-wide P/E at Fundai is the total market value of all companies in the industry divided by their total net profit, not a simple average of the companies' P/E ratios. For a twelve-month ratio, the profit in the denominator must also be TTM. Averaging single-company ratios produces a different indicator and is not a substitute for the industry-wide figure.

The group ratio is the result of dividing two totals; the companies in the numerator and denominator must be the same. To check the figure, identify the scope of companies, and do not set the profit of one set against the market value of a different set. A total profit near zero or negative also limits how the industry-wide ratio can be interpreted; the sign of the group's total profit matters.

Comparing a company, its industry and the market requires the same date and the same profit basis. Do not mix annual profit with TTM, or standalone statements with consolidated ones, in a single argument. Even when these conditions are met, a difference in ratios alone does not prove why companies differ; to examine the possible cause, you need to go back to the reports.

The answer to "what is the P/E ratio" in a group comparison also depends on the profit basis. At Fundai, we show the company's ratio next to the industry-wide figure and the market; the comparison requires the same date and basis. The data for this order do not include an industry or market figure for Laban, so we do not make a numerical comparison.

Step 5: Wrap-up — what to do with the P/E result in Fundai

Record the P/E result together with the earnings basis, and choose your next report to read based on the question that remains unresolved. In the Laban example, the ratio was calculated using base EPS, but we did not have the data needed to build a full TTM figure and to compare the group. The practical conclusion is to keep that boundary: label the calculation that was done with its correct name, and do not draw conclusions from the part that is incomplete.

To start screening several companies, apply a P/E TTM condition on the filters page. The filter output is a starting point for research; the threshold you pick is not a measure of which companies are better.

1. Select the industry In "General filters", choose your target group under "Industry"; to follow the Laban example, select "Agriculture and Related Services".

2. Apply the financial ratio condition From the "Financial ratios" family, select P/E TTM, and for practice, choose the "Less than" operator and enter 10; the practice threshold of 10 times carries no valuation verdict.

3. Review the output on a like-for-like basis Compare the ratios of the companies in the output with the figure for the whole industry and the market on the same date and on a TTM basis. Then read the income statement; do not replace Laban's unknown figure with a number from a different basis.

#P/E TTM #Fundamental Analysis #Earnings Per Share #Comparison with Industry #Price-to-Earnings Ratio