In This Article:
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 Shankara Building Products Limited’s (NSE:SHANKARA) P/E ratio could help you assess the value on offer. Shankara Building Products has a price to earnings ratio of 17.09, based on the last twelve months. That corresponds to an earnings yield of approximately 5.9%.
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How Do I Calculate Shankara Building Products’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Shankara Building Products:
P/E of 17.09 = ₹507.2 ÷ ₹29.68 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Shankara Building Products’s earnings per share fell by 2.8% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 21%.
How Does Shankara Building Products’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Shankara Building Products has a lower P/E than the average (21.2) in the specialty retail industry classification.
This suggests that market participants think Shankara Building Products will underperform other companies in its industry. Since the market seems unimpressed with Shankara Building Products, 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.
Remember: P/E Ratios Don’t Consider The Balance Sheet
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.