The price-to-earnings (P/E) ratio is one of the most fundamental valuation metrics in equity analysis. It is calculated by dividing the current share price by the earnings per share (EPS) over the most recent twelve months (trailing P/E) or the forecast EPS for the coming year (forward P/E).
A P/E of 15 means investors are willing to pay LKR 15 for every LKR 1 the company earns annually. Whether that is "cheap" or "expensive" depends on the company's growth prospects, sector norms, and broader market conditions.
In Sri Lanka, average market P/E ratios tend to be lower than in developed markets, partly reflecting macroeconomic risk premiums and the size of the economy. Comparing a CSE-listed company's P/E to its sector peers, its own historical P/E range, and the ASPI market average gives the most contextually useful read.
The P/E ratio is most meaningful for established, profitable businesses. It is less useful for loss-making companies (where EPS is negative, making the ratio undefined) or for highly cyclical industries where earnings swing sharply across economic cycles.