In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Dhanuka Agritech Limited's (NSE:DHANUKA) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Dhanuka Agritech's P/E ratio is 13.59. That corresponds to an earnings yield of approximately 7.4%.
See our latest analysis for Dhanuka Agritech
How Do I Calculate Dhanuka Agritech's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Dhanuka Agritech:
P/E of 13.59 = ₹310.8 ÷ ₹22.88 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Does Dhanuka Agritech's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Dhanuka Agritech has a higher P/E than the average company (11.2) in the chemicals industry.
Its relatively high P/E ratio indicates that Dhanuka Agritech shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Dhanuka Agritech shrunk earnings per share by 11% over the last year. But it has grown its earnings per share by 3.5% per year over the last five years. And over the longer term (3 years) earnings per share have decreased 18% annually. This could justify a low P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
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.