Are there instances when I should not rely on the PE ratio?

Hello! You should not rely solely on the PE ratio without considering the growth prospects of the company. A high PE ratio should be justified by projected growth rates, or it would most probably be overpriced. To have a more complete picture, the PEG (Price/earnings growth) ratio is a more accurate reflection. Similar to the PE ratio, a lower PEG could entail that the stock is undervalued. For example, a tech company could have a PE ratio and PEG ratio of 50 and 2.5 respectively while a F&B company could have a PE and PEG ratio of 15 and 1.5. Comparing these numbers, the tech company doesn't have the growth rate to justify its higher PE ratio and thus the stock price is over valued.

Hi,

If the business you are investing is asset type or the company's net profit is understated because of depreciation then using PE ratio is not applicable.