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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at ShreeOswal Seeds and Chemicals Limited's (NSE:OSWALSEEDS) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, ShreeOswal Seeds and Chemicals has a P/E ratio of 14.53. That corresponds to an earnings yield of approximately 6.9%.
See our latest analysis for ShreeOswal Seeds and Chemicals
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 ShreeOswal Seeds and Chemicals:
P/E of 14.53 = ₹26.3 ÷ ₹1.81 (Based on the year to March 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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 ShreeOswal Seeds and Chemicals's P/E Ratio Compare To Its Peers?
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 (16.2) for companies in the food industry is higher than ShreeOswal Seeds and Chemicals's P/E.
This suggests that market participants think ShreeOswal Seeds and Chemicals will underperform other companies in its 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.
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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
ShreeOswal Seeds and Chemicals shrunk earnings per share by 60% over the last year. But EPS is up 45% over the last 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.