- Wealth PMS (50L+)
The Nifty Price to Earnings Ratio is calculated by using the Nifty members' market capitalization divided by the total earnings of all members of the Nifty. We plot that along with the Earnings Per Share or EPS Growth.
The Nifty doesn't have shares - it's an index. So how does it have an EPS? Simply put, we assume it has shares, to calculate the earnings per unit of Nifty. So we divided the Nifty value by the P/E and we get the EPS. What we care about is how much is this earnings growing per year? Typically you would expect that if you pay a 20 P/E for an index, that you should be seeing growth at 20% plus. This is a thumb rule, but you typically won't pay a high P/E for a slow growing company or index.
Or won't you? Here's how the situation is for the Nifty: