In This Article:
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use J.K. Cement Limited's (NSE:JKCEMENT) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, J.K. Cement has a P/E ratio of 27.25. In other words, at today's prices, investors are paying ₹27.25 for every ₹1 in prior year profit.
Check out our latest analysis for J.K. Cement
How Do You Calculate J.K. Cement's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for J.K. Cement:
P/E of 27.25 = ₹1001.3 ÷ ₹36.74 (Based on the trailing twelve months to March 2019.)
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
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.
J.K. Cement saw earnings per share decrease by 11% last year. But over the longer term (5 years) earnings per share have increased by 27%.
Does J.K. Cement Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that J.K. Cement has a P/E ratio that is roughly in line with the basic materials industry average (25.7).
That indicates that the market expects J.K. Cement will perform roughly in line with other companies in its industry. So if J.K. Cement actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.