Lesson 16: The P/E Ratio: Price vs Earnings

EPS tells you how many shillings of profit sit behind each share. The P/E ratio tells you how many shillings of price the market is asking you to pay for each of those shillings of profit — and that's the first real step toward judging whether a share price is justified.

The question EPS alone can't answer

Last lesson you learned that Safaricom's FY2024 EPS was KShs 1.6 and Equity Group's was KShs 12.34. On its own, a bigger EPS number doesn't mean a "better" share — it partly just reflects how many shares each company has issued. What EPS can tell you, once you bring in the share price, is whether the price you'd pay looks expensive or cheap relative to the earnings you're buying. That's what the price-to-earnings ratio, or P/E, is for.

P/E ratio, defined

P/E = Share price ÷ Earnings per share (EPS). It answers: "how many shillings am I paying today for each shilling of annual profit this company earns?" A P/E of 20 means you're paying 20 shillings of price for every 1 shilling of yearly earnings — put another way, if profit stayed exactly the same forever, it would take about 20 years of earnings to "earn back" the price you paid.

Working it out for Safaricom — with an important catch

Safaricom's share price in mid-July 2026 was about KShs 35.95. Its FY2024 (year ended 31 March 2024) EPS was KShs 1.6.

Safaricom PLC — illustrative P/E, mid-July 2026 price vs FY2024 EPS
KShs per share	Value
Share price (~mid-July 2026)	35.95
Basic EPS, FY2024 (year ended 31 March 2024)	1.6
P/E = 35.95 ÷ 1.6	≈ 22.5x

Do not treat that 22.5x as precise

This calculation mixes a mid-2026 share price with an FY2024 EPS figure — over two years old by the time you read this. Two things make it even shakier: first, Safaricom carried out a stock split after FY2024, which changes how many shares exist and therefore changes EPS going forward, even if total profit were unchanged. Second, more recent EPS figures almost certainly exist on Safaricom's investor relations page and should be checked before you rely on any P/E number. Treat 22.5x here as illustrative only — a demonstration of the calculation, not a number to act on.

Working it out for Equity Group

Equity Group's share price in mid-July 2026 was about KShs 86.75. Its FY2024 (year ended 31 December 2024) EPS was KShs 12.34.

Equity Group Holdings PLC — illustrative P/E, mid-July 2026 price vs FY2024 EPS
KShs per share	Value
Share price (~15 July 2026)	86.75
Basic & diluted EPS, FY2024 (year ended 31 December 2024)	12.34
P/E = 86.75 ÷ 12.34	≈ 7.0x

The same caveat applies here: Equity Group has already reported Q1 2026 results (one quarter, not a full year) showing EPS of KShs 4.86, up from KShs 3.92 a year earlier — a sign that FY2024's EPS of 12.34 is stale and profit has likely grown since. As with Safaricom, treat this 7.0x as an illustration of the mechanics, not a final verdict on whether Equity Group is cheap.

What the two numbers hint at — carefully

Even as rough illustrations, 22.5x (Safaricom) versus 7.0x (Equity Group) is a striking gap. It's tempting to say "Equity Group is cheaper." But P/E ratios are only meaningfully compared within the same industry — a telco and a bank have different growth profiles, different capital structures, and different risks, so the market may quite reasonably price them differently. A telco investing heavily in new infrastructure (recall Lesson 1's rising depreciation) might command a higher P/E if investors expect that spending to pay off in future earnings growth. The honest takeaway from this comparison is "these two numbers are far apart and worth investigating further," not "one company is definitely a better buy."

A rough Kenyan market reference point

As a general rule of thumb quoted by Kenyan market commentators (for example, Kenyan Wallstreet), a P/E below roughly 10x is often considered "low" on the Nairobi Securities Exchange, while a P/E above roughly 20x is often considered "expensive" — though what counts as normal varies a lot by sector. Use this only as a loose reference, not a rule: a low P/E can mean "cheap" or it can mean "the market expects trouble ahead," and a high P/E can mean "expensive" or "the market expects strong future growth." The number alone doesn't tell you which.

Check your understanding

Safaricom's illustrative P/E works out to about 22.5x using a mid-2026 share price and FY2024 EPS. What is the single biggest reason to be cautious about this specific number?

What's next

Next lesson, we'll look at dividend yield — a different way of asking "am I getting paid to hold this share," using the confirmed dividend figures for both Safaricom and Equity Group.

Go deeper

Something unclear, or want to dig into a line item we skipped (like "what a stock split actually does to EPS")? Ask your teacher — that's what these sessions are for.