Does Allcargo Logistics Limited (NSE:ALLCARGO) Have A Good P/E Ratio?

Simply Wall St

Wed, Jul 3, 2019, 7:30 PM

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how Allcargo Logistics Limited's (NSE:ALLCARGO) P/E ratio could help you assess the value on offer. What is Allcargo Logistics's P/E ratio? Well, based on the last twelve months it is 10.62. That is equivalent to an earnings yield of about 9.4%.

Check out our latest analysis for Allcargo Logistics

How Do I Calculate Allcargo Logistics's Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Allcargo Logistics:

P/E of 10.62 = ₹104.6 ÷ ₹9.85 (Based on the year to March 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Allcargo Logistics increased earnings per share by a whopping 41% last year. And its annual EPS growth rate over 5 years is 11%. I'd therefore be a little surprised if its P/E ratio was not relatively high.

Does Allcargo Logistics 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. If you look at the image below, you can see Allcargo Logistics has a lower P/E than the average (17.9) in the logistics industry classification.

NSEI:ALLCARGO Price Estimation Relative to Market, July 3rd 2019

Allcargo Logistics's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.