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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Balmer Lawrie & Co. Ltd.'s (NSE:BALMLAWRIE) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Balmer Lawrie's P/E ratio is 12.05. That means that at current prices, buyers pay ₹12.05 for every ₹1 in trailing yearly profits.
See our latest analysis for Balmer Lawrie
How Do You Calculate Balmer Lawrie's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Balmer Lawrie:
P/E of 12.05 = ₹170.3 ÷ ₹14.13 (Based on the year to March 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. 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 Balmer Lawrie Have A Relatively High Or Low P/E For Its Industry?
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 Balmer Lawrie has a lower P/E than the average (20.2) in the industrials industry classification.
This suggests that market participants think Balmer Lawrie will underperform other companies in its industry. Since the market seems unimpressed with Balmer Lawrie, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, 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. 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.
Balmer Lawrie's earnings per share fell by 2.5% in the last twelve months.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
So What Does Balmer Lawrie's Balance Sheet Tell Us?
With net cash of ₹4.9b, Balmer Lawrie has a very strong balance sheet, which may be important for its business. Having said that, at 25% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.