## If PE is Low = Cheap Stocks? Investors Must Truly Know Before Deciding

The stock market has experienced a major decline, and you see stocks that have fallen in price climbing back up. Everyone is watching, but do you know whether these prices are cheap or expensive? Should you buy here? When will you make a profit? Do these questions have the same answer? It's difficult to judge whether a stock is cheap or expensive based on feelings alone. But if you apply academic investment principles, we have several standard measures. Serious investors often rely most on the **PE ratio** because it reveals one important truth: how many years it takes to recover your investment.

## Where does PE come from, and what does it tell us?

**PE stands for Price per Earning ratio** or literally, "Price per Earnings." It tells us only one thing: if we buy this stock at the current price and the company continues to earn the same profit every year, how many years will it take to recoup our investment?

For example, if you buy a stock at 5 baht per share and the company’s EPS (Earnings Per Share) is 0.5 baht, the calculation gives PE = 10 years. This means every 10 years, the company will pay you 0.5 baht/year x 10 years = 5 baht, exactly matching the price you paid.

## How to quickly calculate PE

**PE = Price per share (Price) ÷ Earnings Per Share (EPS)**

It’s simple, but there are two variables that influence it:
- **Price per share (Price)**: The cheaper you buy, the lower the PE.
- **EPS (Earnings Per Share)**: The more profit the company makes, the lower the PE. For example, if the same company’s profit increases to 1 baht per share, the PE drops to 5 years. The higher the profit, the faster you can recover your investment.

**Most investors overlook this point: a low PE doesn’t always mean the stock is cheap. It means the company is currently making a lot of profit.**

## Forward PE vs Trailing PE: talking about the future vs talking about the past

Investors encounter two types of PE:

**Forward PE (Forward PE):**
Uses the current price divided by "expected profit next year." It’s a forecasting tool. The advantage is looking ahead, giving a picture of the future. The disadvantage is that forecasts are often wrong. Companies may lower expectations to show better results when they announce actual profits, or analysts may have different PE assumptions, leading to confusion.

**Trailing PE (Trailing PE):**
Uses the current price divided by "profit over the past 12 months." It reflects what has already happened. The advantage is it’s based on real data, no guessing needed. The disadvantage is that "the past" doesn’t necessarily predict "the future." If a company recently expanded into a new market, the Trailing PE might not yet reflect that change.

## Big enough to be problematic: limitations of PE

A stock with a PE of 5 looks cheap, but if the company faces a downturn, the PE could spike to 20.

Example: You buy a stock at 5 baht with a PE of 10, planning to hold for 10 years. But halfway through:
- **Good scenario**: The company expands its factory, earnings per share increase to 1 baht, and PE drops to 5. You recover your investment in 5 years instead of 10.
- **Bad scenario**: The company faces trade restrictions, earnings drop to 0.25 baht, and PE rises to 20. Now, you need to hold 20 years to break even.

**PE doesn’t predict the future; it only shows "if conditions remain the same."** But conditions never stay the same in the stock market.

## So, what is PE used for?

PE remains a useful tool for savvy investors because it provides a standard way to compare stocks within the market instead of guessing. The actual process is:
1. Find stocks with low PE compared to the same industry.
2. Dig deeper: why is the PE low? Is the company highly profitable, or are there problems?
3. Study profit trends. If profits are expected to grow, PE may decrease further, giving you more benefit.

If you use PE blindly without considering other factors, you might fall into traps. But if you see it as a starting point for analysis, PE can be a helpful tool.

Successful investors don’t rely on just one tool, but know how to use the right tools in different situations. PE is one of them. Used wisely, it helps you time your investments more accurately.