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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Dilip Buildcon Limited's (NSE:DBL) P/E ratio and reflect on what it tells us about the company's share price. Dilip Buildcon has a P/E ratio of 12.48, based on the last twelve months. That means that at current prices, buyers pay ₹12.48 for every ₹1 in trailing yearly profits.
View our latest analysis for Dilip Buildcon
How Do I Calculate Dilip Buildcon's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Dilip Buildcon:
P/E of 12.48 = ₹498.7 ÷ ₹39.95 (Based on the year to March 2019.)
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. 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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Dilip Buildcon's earnings per share fell by 5.4% in the last twelve months. But EPS is up 18% over the last 5 years.
How Does Dilip Buildcon's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (15) for companies in the construction industry is higher than Dilip Buildcon's P/E.
Dilip Buildcon's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and 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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.