This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Greenlam Industries Limited's (NSE:GRNLAMIND) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Greenlam Industries's P/E ratio is 23.93. That is equivalent to an earnings yield of about 4.2%.
View our latest analysis for Greenlam Industries
How Do You Calculate Greenlam Industries's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Greenlam Industries:
P/E of 23.93 = ₹695.3 ÷ ₹29.06 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
Does Greenlam Industries Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (15.9) for companies in the building industry is lower than Greenlam Industries's P/E.
Its relatively high P/E ratio indicates that Greenlam Industries shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Greenlam Industries increased earnings per share by 5.4% last year. And its annual EPS growth rate over 3 years is 23%.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).