In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Hilton Metal Forging Limited's (NSE:HILTON), to help you decide if the stock is worth further research. Hilton Metal Forging has a P/E ratio of 30.16, based on the last twelve months. That corresponds to an earnings yield of approximately 3.3%.
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Check out our latest analysis for Hilton Metal Forging
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 Hilton Metal Forging:
P/E of 30.16 = ₹15.05 ÷ ₹0.50 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each ₹1 of company earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Hilton Metal Forging's earnings per share fell by 63% in the last twelve months. And EPS is down 29% a year, over the last 5 years. This could justify a pessimistic P/E.
Does Hilton Metal Forging Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, Hilton Metal Forging has a higher P/E than the average company (17.2) in the machinery industry.
That means that the market expects Hilton Metal Forging will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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. 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.