This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Ganges Securities Limited’s (NSE:GANGESSEC) P/E ratio and reflect on what it tells us about the company’s share price. Ganges Securities has a P/E ratio of 5.21, based on the last twelve months. In other words, at today’s prices, investors are paying ₹5.21 for every ₹1 in prior year profit.
View our latest analysis for Ganges Securities
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 Ganges Securities:
P/E of 5.21 = ₹46.9 ÷ ₹9.01 (Based on the trailing twelve months to March 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It’s nice to see that Ganges Securities grew EPS by a stonking 60% in the last year.
How Does Ganges Securities’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Ganges Securities has a lower P/E than the average (17.8) P/E for companies in the food industry.
Its relatively low P/E ratio indicates that Ganges Securities shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).