Does G N A Axles Limited (NSE:GNA) Have A Good P/E Ratio?

Simply Wall St

Sun, Jul 7, 2019, 7:21 PM

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how G N A Axles Limited's (NSE:GNA) P/E ratio could help you assess the value on offer. G N A Axles has a P/E ratio of 8.62, based on the last twelve months. That corresponds to an earnings yield of approximately 12%.

View our latest analysis for G N A Axles

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 G N A Axles:

P/E of 8.62 = ₹264.4 ÷ ₹30.67 (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. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'

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. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Notably, G N A Axles grew EPS by a whopping 29% in the last year. And earnings per share have improved by 29% annually, over the last five years. So we'd generally expect it to have a relatively high P/E ratio.

How Does G N A Axles's P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see G N A Axles has a lower P/E than the average (14.8) in the auto components industry classification.

NSEI:GNA Price Estimation Relative to Market, July 8th 2019

This suggests that market participants think G N A Axles will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.

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. 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.