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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Advanced Enzyme Technologies Limited’s (NSE:ADVENZYMES) P/E ratio to inform your assessment of the investment opportunity. Advanced Enzyme Technologies has a price to earnings ratio of 16.96, based on the last twelve months. That is equivalent to an earnings yield of about 5.9%.
See our latest analysis for Advanced Enzyme Technologies
How Do You Calculate Advanced Enzyme Technologies’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Advanced Enzyme Technologies:
P/E of 16.96 = ₹162.25 ÷ ₹9.57 (Based on the year to September 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Notably, Advanced Enzyme Technologies grew EPS by a whopping 47% in the last year. And earnings per share have improved by 18% annually, over the last five years. So we’d generally expect it to have a relatively high P/E ratio.
How Does Advanced Enzyme Technologies’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Advanced Enzyme Technologies has a higher P/E than the average (15.4) P/E for companies in the chemicals industry.
Advanced Enzyme Technologies’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.