Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Pansari Developers Limited's (NSE:PANSARI) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Pansari Developers has a P/E ratio of 20.36. That means that at current prices, buyers pay ₹20.36 for every ₹1 in trailing yearly profits.
View our latest analysis for Pansari Developers
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Pansari Developers:
P/E of 20.36 = ₹22.8 ÷ ₹1.12 (Based on the year to March 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
Pansari Developers shrunk earnings per share by 39% over the last year. And EPS is down 22% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.
Does Pansari Developers Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Pansari Developers has a higher P/E than the average company (17.4) in the real estate industry.
Its relatively high P/E ratio indicates that Pansari Developers shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.