In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Dwarikesh Sugar Industries Limited's (NSE:DWARKESH) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Dwarikesh Sugar Industries's P/E ratio is 5.03. That corresponds to an earnings yield of approximately 20%.
See our latest analysis for Dwarikesh Sugar Industries
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Dwarikesh Sugar Industries:
P/E of 5.03 = ₹22.55 ÷ ₹4.48 (Based on the year to June 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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 Does Dwarikesh Sugar Industries's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Dwarikesh Sugar Industries has a lower P/E than the average (14.3) in the food industry classification.
Dwarikesh Sugar Industries's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Dwarikesh Sugar Industries increased earnings per share by an impressive 16% over the last twelve months. Unfortunately, earnings per share are down 16% a year, over 3 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.