The market is currently down a lot. Many people are probably watching stocks, but they can't figure out if the current prices are really cheap, whether they should buy now, if buying will make a profit, and how many questions like this there are.

Actually, besides instinctively looking at prices, investors have many tools to measure whether stocks are overvalued or undervalued. But the oldest and most popular method is the P/E ratio, which, if understood well, can help make more accurate buy decisions.

What exactly is the P/E ratio? Its full name is Price per Earning ratio, which is the ratio of the stock price to earnings per share. Simply put, if we buy a stock at this price, how many years do we have to wait to recover our investment from the company's profits?

The calculation is very simple: P/E = stock price divided by earnings per share (EPS). For example, if a stock costs 5 baht and the company makes a profit of 0.5 baht per share, then the P/E ratio is 10 times. This means every year, the company gives you a profit of 0.5 baht, and in 10 years, you will have recovered your initial investment of 5 baht.

Why is a low P/E ratio considered good? Because it indicates the stock is cheap and will take less time to recover your investment. Conversely, if the P/E is high, it means you'll have to wait longer to break even.

But investors need to be cautious because there are two types of P/E: Forward P/E and Trailing P/E. Forward P/E uses projected future profits, which seems good, but the problem is that companies might underestimate future profits or analysts might have different opinions, making the numbers uncertain.

Trailing P/E uses actual profits from the past 12 months, which is more accurate because it's based on real data. However, the downside is that past performance doesn't necessarily predict the future.

Another limitation to know is that P/E isn't constant over time; EPS can change. For example, if a company expands its market or faces trading issues, profits may increase or decrease. When EPS changes, the P/E ratio will change accordingly.

For instance, if EPS increases from 0.5 to 1 baht, the P/E ratio drops from 10 to 5 times. This means you can recover your investment faster. But if EPS decreases, your profit diminishes.

So why do investors still use P/E? Because it's a standardized method that makes it easy to compare different stocks. After selecting stocks based on P/E, you can also study other limitations and factors.

In summary, the P/E ratio is a useful tool, but it’s not the only one. Good investing requires using multiple tools together. You shouldn't rely solely on P/E. Understanding P/E well can actually help you better time your stock purchases.