The stock market is adjusting downward like it is now. I see many people starting to focus on different stocks, but they are still unsure whether the current prices are cheap or expensive. Should they buy now? And when can they make a profit? Many questions like this are asked.

So how do you know if a stock is fairly valued? If you ask value investors, they will point to the PE Ratio immediately. PE stands for Price to Earnings ratio, which is the ratio between the stock price and the company's profit.

To understand simply: PE is a measure that tells you how many years you need to wait to recover your investment if the company’s profit remains the same every year.

The calculation method is very simple: PE = Stock Price divided by Earnings Per Share (EPS). Both of these numbers are important.

The first is the price you buy at. The lower the purchase price, the lower the PE. The second is EPS — net profit per share, calculated from the company's total profit divided by the total number of shares. If the company makes a lot of profit, EPS is high, and PE will be lower.

Let’s look at an example: Suppose you buy a stock at 5 baht, and at that time, the company’s EPS is 0.5 baht. The PE ratio is 10 times. This means that every year, the company pays you a profit of 0.5 baht. You need 10 years to recover the 5 baht investment.

Currently, PE is derived from this ratio, and there are two popular types:

First is Forward P/E — using the current price divided by the projected future profit. The advantage is that it looks forward, but the problem is that forecasts are uncertain. The company might underestimate profits to beat expectations, and then.

The second is Trailing P/E — using the current price divided by the actual profit over the past 12 months. Most investors prefer this because it’s based on real numbers that have already occurred, no guessing needed. But the downside is that the past doesn’t tell us what the future will be.

What to watch out for is that EPS isn’t constant over time. Imagine if a company expands production or enters new markets, and EPS increases to 1 baht. The PE would then drop to 5 times. At this point, the breakeven point is 5 years instead of 10.

Conversely, if the company faces problems, such as trade restrictions, and EPS drops to 0.25 baht, the PE would rise to 20 times. You would need 20 years to recover your investment.

Therefore, PE is a useful tool, but it’s not everything. The advantage of PE is that it allows comparison of different stocks on a standard basis. The disadvantage is that it doesn’t tell the whole story.

I believe smart investors shouldn’t rely solely on PE. Use it as an initial filter to find undervalued stocks, then dig deeper into the actual business, look at future trends, competitors, management quality. PE helps prevent us from falling into traps, but deep knowledge about the company itself is what truly enables us to make profits.