Does Hindustan Aeronautics Limited (NSE:HAL) Have A Good P/E Ratio?

Simply Wall St

Fri, Jun 7, 2019, 7:15 PM

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Hindustan Aeronautics Limited's (NSE:HAL), to help you decide if the stock is worth further research. What is Hindustan Aeronautics's P/E ratio? Well, based on the last twelve months it is 10.54. In other words, at today's prices, investors are paying ₹10.54 for every ₹1 in prior year profit.

View our latest analysis for Hindustan Aeronautics

How Do You Calculate Hindustan Aeronautics's P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Hindustan Aeronautics:

P/E of 10.54 = ₹713.65 ÷ ₹67.73 (Based on the year 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

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. 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.

Hindustan Aeronautics increased earnings per share by an impressive 16% over the last twelve months. And its annual EPS growth rate over 5 years is 3.9%. So one might expect an above average P/E ratio.

Does Hindustan Aeronautics Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (13.3) for companies in the aerospace & defense industry is higher than Hindustan Aeronautics's P/E.

NSEI:HAL Price Estimation Relative to Market, June 8th 2019

Hindustan Aeronautics's P/E tells us that market participants think it will not fare as well as its peers in the same 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.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.