What is P/E Ratio?
Definition
The price-to-earnings (P/E) ratio is a valuation metric used to determine the amount investors are willing to pay per rupee of a company's earnings.
A high P/E ratio often corresponds to a high valuation, indicating strong future growth expectations. Conversely, a low P/E ratio can suggest that a stock is undervalued or faces low investor sentiment.
Market Effect
Investor Sentiment & Flows
High P/E ratios in small-cap stocks can be associated with "risk-on" periods in the market. This often results in new capital flowing into smaller, higher-beta stocks, which are typically more volatile but offer higher growth potential.
Future Returns
Historically, high P/E levels have often been followed by periods of modest returns as valuations revert to their mean.
Volatility
The P/E ratios of small-cap stocks tend to have a greater range (e.g., a 1-year range of 25.9x to 35.6x). This wide fluctuation magnifies market movements, whether they are sideways trends or significant declines.
Historical Data & Charts
Annual Average P/Es (Nifty Small-Cap 50, 2015–2024)
The chart below shows the average P/E ratio for the Nifty Small-Cap 50 index over the last decade, illustrating the cyclical nature of small-cap valuations.
Latest Valuations & Ranges
The following tables provide a snapshot of the current P/E ratio and its historical ranges for the Nifty Smallcap 250 index.
| Index | Latest P/E | Data Date |
|---|---|---|
| Nifty Smallcap 250 | 33.4× | 11 Jun 2025 |
| Valuation Ranges (Trendlyne) | ||
|---|---|---|
| Time Frame | P/E Low | P/E High |
| 1 Year | 25.9× | 35.6× |
| 2 Years | 20.3× | 35.6× |
| 5 Years | 16.9× | 130.8× |
Comparison with Peers
This chart and table compare the latest P/E of the Nifty Smallcap 250 with other major indices, highlighting the current valuation premium.
| Index | Latest P/E | “Normal” (5Y Median) P/E | Market Cap (₹ Cr) |
|---|---|---|---|
| Nifty Smallcap 250 | 33.4× | 27.25× | 47,33,861 |
| Nifty Midcap 100 | 33.4× | (not published) | 66,64,194 |
| Nifty 50 | 22.6× | 20–22× | 1,99,57,151 |
Key Insights
Valuations Elevated
The current P/E is comfortably above its historical average, indicating a potentially crowded trade that may require corrections or earnings upgrades to be sustained.
Risk & Reward
The wide 5-year P/E range (16.9x to 130.8x) highlights the potential for both significant declines and strong recoveries, making it suitable for disciplined, long-term investors.
Large Caps to Premium Caps
Small-caps are trading at an almost 50% premium to the Nifty 50. This is driven by higher growth expectations, but it also comes with increased risk.
Mid and Small-cap Convergence
With a P/E nearly identical to the Midcap 100, some small-cap valuations may have moved "upstream" due to market momentum and a focus on quality.
Earnings Growth Watch
Given the high multiples, it's crucial to closely monitor quarterly earnings growth and revisions to avoid being caught in a late-cycle valuation bubble.
Historical Context
The estimated average P/E since the index's inception (~28x) suggests that the current level of ~33.4x is elevated compared to its long-term equilibrium.
Frequently Asked Questions
The Nifty small cap index is the measure of valuation in relation to earnings. A PE of 25 means that for every rupee of company earnings, an investor pays 25 rupees. Current smallcap 100 PE: 26.9x (as of May 2025).
It is historically the level that has been seen just before huge corrections (last seen in January 2008):
- 2008: -80%
- 2010-13: -55%
- 2018-20: -65%
Thus, the ratio today indicates that small caps are at extreme stress levels.
Yes, in a way, but:
- They are selling more than 20% over Nifty 50 (that was never seen since 2014) as they are at a premium.
- But 67 percent of the newest gains produced by earnings don't relate to speculation.
- The median P/E in small caps is 33.3x compared to Nifty 50's 22.3x-selective investment is the key.
To achieve below long-term averages,
- -17% for Nifty 50
- -39% correction for small caps.
| PE Range | Market State | Action |
|---|---|---|
| >25 | Overpriced | Reduce exposure |
| 20-25 | Neutral | Maintain SIPs |
| <20 | Undervalued | Aggressively buy |
NSE shifted from standalone reporting of earnings to consolidated reporting. Adjusted for this, the Nifty PE is some 26 now (not directly comparable to pre-2021).
- Quant Small Cap Fund (PE 24x)
- Nippon Small Cap Fund (PE 26x)
Avoid funds with PE >45x (e.g. some midcap funds).
Apply PE-based allocation:
- Current Nifty PE (22.3): Invest 1X
- When it goes to 18: Invest 2X
- When it drops to 12: Invest 3X
(X = your base monthly investment).
Yes, savagely:
- Small-caps were delivering 40% CAGR (2020-2025) after the lockdown due to COVID.
- Typically, the post-correction recoveries resulted in gains of more than 120% (2009, 2016, and 2020).