The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Vinny Overseas Limited's (NSE:VINNY) P/E ratio and reflect on what it tells us about the company's share price. Vinny Overseas has a P/E ratio of 8.51, based on the last twelve months. That means that at current prices, buyers pay ₹8.51 for every ₹1 in trailing yearly profits.
See our latest analysis for Vinny Overseas
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Vinny Overseas:
P/E of 8.51 = ₹35.00 ÷ ₹4.11 (Based on the trailing twelve months 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.
Does Vinny Overseas 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. If you look at the image below, you can see Vinny Overseas has a lower P/E than the average (10.0) in the luxury industry classification.
Vinny Overseas's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Vinny Overseas, 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
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.
Vinny Overseas saw earnings per share decrease by 9.8% last year. But EPS is up 32% over the last 5 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.