This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use ECE Industries Limited’s (NSE:ECEIND) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, ECE Industries’s P/E ratio is 3.17. In other words, at today’s prices, investors are paying ₹3.17 for every ₹1 in prior year profit.
Check out our latest analysis for ECE Industries
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for ECE Industries:
P/E of 3.17 = ₹220 ÷ ₹69.32 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings 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
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the ‘E’ will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
ECE Industries increased earnings per share by an impressive 21% over the last twelve months. And earnings per share have improved by 71% annually, over the last five years. So one might expect an above average P/E ratio.
How Does ECE Industries’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see ECE Industries has a lower P/E than the average (13.7) in the electrical industry classification.
This suggests that market participants think ECE Industries will underperform other companies in its industry. Since the market seems unimpressed with ECE Industries, it’s quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.