In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Pil Italica Lifestyle Limited’s (NSE:PILITA) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Pil Italica Lifestyle’s P/E ratio is 21.5. In other words, at today’s prices, investors are paying ₹21.5 for every ₹1 in prior year profit.
See our latest analysis for Pil Italica Lifestyle
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Pil Italica Lifestyle:
P/E of 21.5 = ₹6.42 ÷ ₹0.30 (Based on the year to December 2018.)
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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Pil Italica Lifestyle’s earnings per share fell by 16% in the last twelve months. But EPS is up 3.7% over the last 5 years.
How Does Pil Italica Lifestyle’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Pil Italica Lifestyle has a lower P/E than the average (29.1) P/E for companies in the consumer durables industry.
Pil Italica Lifestyle’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. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).