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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Archidply Industries Limited's (NSE:ARCHIDPLY), to help you decide if the stock is worth further research. Archidply Industries has a price to earnings ratio of 16.03, based on the last twelve months. That means that at current prices, buyers pay ₹16.03 for every ₹1 in trailing yearly profits.
Check out our latest analysis for Archidply Industries
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 Archidply Industries:
P/E of 16.03 = ₹25.95 ÷ ₹1.62 (Based on the year to June 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does Archidply Industries 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. The image below shows that Archidply Industries has a higher P/E than the average (9) P/E for companies in the forestry industry.
Its relatively high P/E ratio indicates that Archidply Industries shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Archidply Industries's earnings made like a rocket, taking off 84% last year. Regrettably, the longer term performance is poor, with EPS down 4.1% per year over 5 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. 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.