In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Gulshan Polyols Limited’s (NSE:GULPOLY) P/E ratio to inform your assessment of the investment opportunity. Gulshan Polyols has a price to earnings ratio of 14.01, based on the last twelve months. In other words, at today’s prices, investors are paying ₹14.01 for every ₹1 in prior year profit.
Check out our latest analysis for Gulshan Polyols
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Gulshan Polyols:
P/E of 14.01 = ₹69.2 ÷ ₹4.94 (Based on the year to September 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. 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 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. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
Most would be impressed by Gulshan Polyols earnings growth of 15% in the last year. Unfortunately, earnings per share are down 6.3% a year, over 5 years.
How Does Gulshan Polyols’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Gulshan Polyols has a lower P/E than the average (16.4) in the chemicals industry classification.
Gulshan Polyols’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. 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.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
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.