Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Focus Lighting and Fixtures Limited's (NSE:FOCUS) P/E ratio to inform your assessment of the investment opportunity. What is Focus Lighting and Fixtures's P/E ratio? Well, based on the last twelve months it is 4.95. That means that at current prices, buyers pay ₹4.95 for every ₹1 in trailing yearly profits.
Check out our latest analysis for Focus Lighting and Fixtures
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 Focus Lighting and Fixtures:
P/E of 4.95 = ₹47.85 ÷ ₹9.67 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each ₹1 the company has earned over the last year. 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.
Does Focus Lighting and Fixtures Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Focus Lighting and Fixtures has a lower P/E than the average (12) P/E for companies in the electrical industry.
Its relatively low P/E ratio indicates that Focus Lighting and Fixtures shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Focus Lighting and Fixtures, 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.
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. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Focus Lighting and Fixtures's earnings made like a rocket, taking off 61% last year. The cherry on top is that the five year growth rate was an impressive 57% per year. With that kind of growth rate we would generally expect a high P/E ratio.
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.