In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Godrej Properties Limited's (NSE:GODREJPROP) P/E ratio and reflect on what it tells us about the company's share price. Godrej Properties has a price to earnings ratio of 67.16, based on the last twelve months. In other words, at today's prices, investors are paying ₹67.16 for every ₹1 in prior year profit.
Check out our latest analysis for Godrej Properties
How Do I Calculate Godrej Properties's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Godrej Properties:
P/E of 67.16 = ₹903.7 ÷ ₹13.46 (Based on the trailing twelve months to June 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does Godrej Properties's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Godrej Properties has a much higher P/E than the average company (15) in the real estate industry.
Godrej Properties's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
In the last year, Godrej Properties grew EPS like Taylor Swift grew her fan base back in 2010; the 72% gain was both fast and well deserved. Having said that, the average EPS growth over the last three years wasn't so good, coming in at 7.2%.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. 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.
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.