How to value a PSX stock: P/E ratios, EPS and dividend yield

KARACHI: "Is this share expensive?" is the most important question in investing — and the most avoided. Valuation ratios do not predict the future, but they stop you from paying Rs 100 for Rs 40 of value. Three numbers do most of the work on the Pakistan Stock Exchange.

EPS and the P/E ratio

Earnings per share (EPS) is a company's annual profit divided by its number of shares — your slice of the profit per share you own. The price-to-earnings (P/E) ratio divides the share price by EPS: it tells you how many rupees you pay for each rupee of yearly profit. A P/E of 8 means you pay Rs 8 per Rs 1 of earnings. Lower is generally cheaper — but compare within sectors, not across them. A bank at P/E 6 and a tech company at P/E 25 can both be fairly priced, because their growth prospects differ. Also check whether the "E" is last year's actual earnings or analysts' forecasts; forecasts are guesses wearing suits.

Dividend yield: Pakistan's speciality

Dividend yield is the annual dividend per share divided by the share price. Pakistani blue chips — banks, energy companies, fertiliser producers — have historically paid generous dividends, and yields of 8–15% are not unusual in weak markets. That sounds wonderful until you remember a high yield can signal a falling share price (the market doubting the dividend will survive) rather than generosity. Always ask whether the dividend is covered by actual cash profits, and check our guide on what to look for in PSX dividend stocks.

Book value and P/B

Book value per share is what shareholders would theoretically get per share if the company sold everything and paid all debts. The price-to-book (P/B) ratio compares the market price to this figure. Asset-heavy businesses like banks are often judged on P/B — below 1.0 can mean genuine cheapness or genuine trouble (bad loans the books have not admitted yet). For asset-light IT firms, book value is nearly meaningless; earnings and cash flow matter instead.

What the numbers don't tell you

Ratios describe the past and present, never the future. They miss management quality, regulatory risk (a sudden tax or tariff can rewrite any spreadsheet), and fraud. Use valuation as a filter — "is this worth a closer look?" — then read the annual report, understand the business, and only then decide. Our guide on reading a PSX company's annual report shows you where these numbers live.

Key takeaway: P/E tells you the price of earnings, yield tells you the price of income, P/B tells you the price of assets. Use all three — then look beyond them.