In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Fineotex Chemical Limited’s (NSE:FCL) P/E ratio to inform your assessment of the investment opportunity. Fineotex Chemical has a P/E ratio of 22.01, based on the last twelve months. In other words, at today’s prices, investors are paying ₹22.01 for every ₹1 in prior year profit.
Check out our latest analysis for Fineotex Chemical
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Fineotex Chemical:
P/E of 22.01 = ₹37.15 ÷ ₹1.69 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each ₹1 of company earnings. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Fineotex Chemical shrunk earnings per share by 26% over the last year. But over the longer term (5 years) earnings per share have increased by 17%.
How Does Fineotex Chemical’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Fineotex Chemical has a higher P/E than the average (14.9) P/E for companies in the chemicals industry.
That means that the market expects Fineotex Chemical will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).