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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Nath Bio-Genes (India) Limited’s (NSE:NATHBIOGEN) P/E ratio could help you assess the value on offer. Based on the last twelve months, Nath Bio-Genes (India)’s P/E ratio is 18.19. In other words, at today’s prices, investors are paying ₹18.19 for every ₹1 in prior year profit.
View our latest analysis for Nath Bio-Genes (India)
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Nath Bio-Genes (India):
P/E of 18.19 = ₹338.3 ÷ ₹18.6 (Based on the trailing twelve months to December 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. 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. Earnings growth means that in the future the ‘E’ will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It’s great to see that Nath Bio-Genes (India) grew EPS by 17% in the last year. And it has bolstered its earnings per share by 18% per year over the last five years. This could arguably justify a relatively high P/E ratio.
How Does Nath Bio-Genes (India)’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below Nath Bio-Genes (India) has a P/E ratio that is fairly close for the average for the food industry, which is 17.1.
That indicates that the market expects Nath Bio-Genes (India) will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).