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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 apply a basic P/E ratio analysis to Honda Siel Power Products Limited's (NSE:HONDAPOWER), to help you decide if the stock is worth further research. Honda Siel Power Products has a price to earnings ratio of 19.76, based on the last twelve months. In other words, at today's prices, investors are paying ₹19.76 for every ₹1 in prior year profit.
See our latest analysis for Honda Siel Power Products
How Do You Calculate Honda Siel Power Products's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Honda Siel Power Products:
P/E of 19.76 = ₹1116.45 ÷ ₹56.51 (Based on the trailing twelve months to December 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 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 Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Honda Siel Power Products shrunk earnings per share by 2.0% last year. But EPS is up 27% over the last 5 years.
How Does Honda Siel Power Products's P/E Ratio Compare To Its Peers?
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 Honda Siel Power Products has a P/E ratio that is fairly close for the average for the machinery industry, which is 18.7.
Honda Siel Power Products's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Honda Siel Power Products actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
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.