When the stock market declines, many people start looking for good opportunities to buy stocks. The problem is: how do we know whether the current price is truly cheap, or just looks cheap?

That’s where the P/E ratio is a very important tool for investors. I’ve found that many people still don’t really understand what it is, or how to use it to their advantage.

Put simply, the P/E ratio is the ratio of a stock’s price to its earnings per share (EPS). It tells us how many years it would take to recoup our investment if we buy this stock, assuming the company’s profits remain the same every year.

The calculation is very straightforward: P/E = price per share ÷ EPS. The lower the P/E, the cheaper the stock—and the faster you’ll recoup your investment. For example, if a stock costs 5 baht and has an EPS of 0.5 baht, the P/E would be 10 times, meaning you’d need to wait 10 years to get your money back.

However, there’s a point to be careful about: the P/E ratio comes in two forms. Forward P/E uses projected future earnings, while trailing P/E uses actual earnings that have already occurred over the past 12 months. Most investors prefer trailing P/E because it uses real data—you don’t have to guess. The downside is that it reflects only the past and doesn’t tell you the future.

What you need to remember is that the P/E ratio has limitations. A stock’s EPS is not constant over time—it can change depending on the company’s situation. If the company grows and EPS increases to 1 baht, the P/E will drop to 5 times, meaning a faster payback. But if a negative event happens and EPS falls to 0.25 baht, the P/E will jump to 20 times, and you’d have to wait 20 years.

So, the P/E ratio is only one tool. It helps us compare how expensive or cheap different stocks are using the same benchmark—but it must be used together with other analyses, such as studying the company’s profit trends, liquidity, and other factors.

In short, if you want to choose stocks with good prices, you can use the P/E ratio as a starting point. But don’t rely on it alone, because the stock market is more complicated than that.