Value Trap
A share that looks cheap on backward-looking multiples but is cheap because its business is deteriorating.
How it is identified
Test: the low multiple is explained by declining earnings power rather than by temporary pessimism, so the multiple stays low as earnings fall
Unit
qualitative
In depth
A value trap is the standard failure mode of screening on ratios: the screen finds a low P/E, the investor supplies the assumption that it will revert, and the market was simply right about the decline. The distinguishing question is whether earnings power is intact — a cyclical trough with an unchanged competitive position is temporary, while structural obsolescence is not. Cheapness that persists for years while the numerator and denominator both fall produces losses despite the multiple never looking expensive. High dividend yields on falling prices are a common trap dressed as income.
Worked example
A share falls from ₹200 to ₹80 while EPS falls from ₹20 to ₹8. The P/E is 10 at both prices — it looked cheap the whole way down, because the multiple never told you which direction earnings were heading.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Value Trap” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.