In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Hilton Metal Forging Limited's (NSE:HILTON) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Hilton Metal Forging has a P/E ratio of 5.31. In other words, at today's prices, investors are paying ₹5.31 for every ₹1 in prior year profit.
Check out our latest analysis for Hilton Metal Forging
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Hilton Metal Forging:
P/E of 5.31 = ₹8.08 ÷ ₹1.52 (Based on the trailing twelve months to June 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 isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Does Hilton Metal Forging's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (13.1) for companies in the machinery industry is higher than Hilton Metal Forging's P/E.
This suggests that market participants think Hilton Metal Forging will underperform other companies in its industry. Since the market seems unimpressed with Hilton Metal Forging, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
In the last year, Hilton Metal Forging grew EPS like Taylor Swift grew her fan base back in 2010; the 78% gain was both fast and well deserved. Regrettably, the longer term performance is poor, with EPS down 6.4% per year over 5 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).