In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Kakatiya Cement Sugar and Industries Limited's (NSE:KAKATCEM), to help you decide if the stock is worth further research. Kakatiya Cement Sugar and Industries has a P/E ratio of 25.61, based on the last twelve months. In other words, at today's prices, investors are paying ₹25.61 for every ₹1 in prior year profit.
View our latest analysis for Kakatiya Cement Sugar and Industries
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Kakatiya Cement Sugar and Industries:
P/E of 25.61 = ₹169.9 ÷ ₹6.64 (Based on the year to March 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each ₹1 of company earnings. 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.
Does Kakatiya Cement Sugar and Industries Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (24.7) for companies in the basic materials industry is roughly the same as Kakatiya Cement Sugar and Industries's P/E.
Kakatiya Cement Sugar and Industries's P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
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. Then, a higher P/E might scare off shareholders, pushing the share price down.
Kakatiya Cement Sugar and Industries's earnings per share fell by 51% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 10% annually. This could justify a pessimistic 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. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.