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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Butterfly Gandhimathi Appliances Limited's (NSE:BUTTERFLY), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Butterfly Gandhimathi Appliances has a P/E ratio of 28.68. That means that at current prices, buyers pay ₹28.68 for every ₹1 in trailing yearly profits.
Check out our latest analysis for Butterfly Gandhimathi Appliances
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Butterfly Gandhimathi Appliances:
P/E of 28.68 = ₹162.65 ÷ ₹5.67 (Based on the trailing twelve months to June 2019.)
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 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.
How Does Butterfly Gandhimathi Appliances'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, Butterfly Gandhimathi Appliances has a higher P/E than the average company (22.4) in the consumer durables industry.
Butterfly Gandhimathi Appliances's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. 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.
Butterfly Gandhimathi Appliances shrunk earnings per share by 38% over the last year. And over the longer term (5 years) earnings per share have decreased 6.0% annually. This growth rate might warrant a below average P/E ratio.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.