Price vs Value — Why One Number Rarely Tells the Whole Story
Guest article by Bhuvanaa Shreeram
“Price is what you pay. Value is what you get.”
This idea has echoed through market conversations for decades — yet its meaning continues to evolve.
Valuation is one of the most commonly used terms in investing, and also one of the most misunderstood. There is no universal formula to value a company. The very existence of a market — where one investor sells and another buys — is proof that value is subjective.
There are many ways to value a business. Some rely on historical data; others focus on forward-looking estimates of sales, earnings, cash flows, or profitability. Since all forward-looking models require assumptions, the “right” value varies widely between analysts.
Even large institutional investors and global funds do not get it right all the time. Several high-profile valuation mismatches in recent years — from Theranos to Builder.ai, Byju’s to Unacademy — involved marquee backers on the cap table.
Why Backward-Looking Ratios Like P/E Can Be Misleading
One of the most quoted metrics in equity investing is the Price-to-Earnings (P/E) Ratio — calculated by dividing the stock price by the trailing 12-month earnings per share (EPS).
It is popular for a reason: it is simple, data-driven, and readily available.
But here’s the problem: when you invest in a stock today, you are not paying for its past earnings. You are paying for its future earnings.
That is why a more useful lens is the forward P/E ratio, which uses projected earnings 1–2 years ahead.
However, because forward earnings are based on estimates (and vary across analysts), they are rarely published as standard metrics. Most investors continue to rely on trailing P/E — often making decisions without considering future growth.
This leads to a common mistake: assuming a lower P/E stock is automatically “cheaper.”
A Higher P/E Can Be the Smarter Choice
Consider two companies in the same sector:
Company A: strong fundamentals, consistent growth, trading at 25x P/E
Company B: weak financials, internal issues, trading at 10x P/E
At first glance, B looks cheaper. But if A’s earnings are expected to grow 20–25% annually, it may actually be better valued — even with a higher P/E.
A falling P/E is often a red flag — not a buying signal. It may simply reflect collapsing earnings and falling investor confidence. Chasing low P/E without understanding the story behind it can lead to poor investment outcomes.
Quality Rarely Comes Cheap — And That’s Okay
In a market with abundant domestic and foreign capital, high-quality stocks rarely remain “undiscovered” for long. The moment a company shows consistent strength across financial and operational metrics, demand builds — and price follows.
Investors are pricing in future earnings potential — and, in many cases, those bets are justified.
India vs China: A Lesson in Looking Beyond the Ratio
Over the past 15 years:
China large-cap index: average P/E ~12–13x
India NIFTY 50: average P/E ~24–25x
At face value, China seems cheaper. But those who chased that logic a decade ago have been disappointed:
12-year earnings CAGR: China ~3% | NIFTY 50 ~9.5%
Higher P/E in India reflects higher quality, stronger governance, and more predictable earnings.
Predictability has its premium.
It’s not just the rate of earnings growth that matters — it’s also the reliability of those earnings. India’s consistent GDP growth, stable inflation, and sound monetary policy add confidence to earnings projections. Predictability justifies premium valuations.
What This Means for You
At House of Alpha, we evaluate stocks not just by how “cheap” they look today, but by how sustainable and scalable their future earnings are. Some recommendations may appear expensive on trailing P/E. But when you factor in growth and consistency, the value becomes clear.
Indian indices and stocks may continue to show higher-than-average P/E ratios for some time. That does not make them unattractive for investment.
Valuation will always be part art, part science. The mistake is assuming that low price equals high value.
Keep investing wisely. Stay invested for the long term.