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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Future Lifestyle Fashions Limited's (NSE:FLFL) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Future Lifestyle Fashions's P/E ratio is 45.95. That corresponds to an earnings yield of approximately 2.2%.
Check out our latest analysis for Future Lifestyle Fashions
How Do I Calculate Future Lifestyle Fashions's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Future Lifestyle Fashions:
P/E of 45.95 = ₹451.25 ÷ ₹9.82 (Based on the trailing twelve months to March 2019.)
Is A High P/E 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
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. When earnings grow, the 'E' increases, over time. 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.
Notably, Future Lifestyle Fashions grew EPS by a whopping 48% in the last year. And its annual EPS growth rate over 5 years is 45%. So we'd generally expect it to have a relatively high P/E ratio.
Does Future Lifestyle Fashions Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. As you can see below, Future Lifestyle Fashions has a higher P/E than the average company (35.3) in the specialty retail industry.
Future Lifestyle Fashions's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.