In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Welspun Enterprises Limited's (NSE:WELENT), to help you decide if the stock is worth further research. Based on the last twelve months, Welspun Enterprises's P/E ratio is 13.99. That is equivalent to an earnings yield of about 7.1%.
Check out our latest analysis for Welspun Enterprises
How Do I Calculate Welspun Enterprises's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Welspun Enterprises:
P/E of 13.99 = ₹116.25 ÷ ₹8.31 (Based on the year to December 2018.)
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. 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
In the last year, Welspun Enterprises grew EPS like Taylor Swift grew her fan base back in 2010; the 143% gain was both fast and well deserved. Even better, EPS is up 512% per year over three years. So we'd absolutely expect it to have a relatively high P/E ratio.
Does Welspun Enterprises Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Welspun Enterprises has a lower P/E than the average (15.2) in the construction industry classification.
Welspun Enterprises'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 Welspun Enterprises, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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. 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.