In This Article:
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 South West Pinnacle Exploration Limited's (NSE:SOUTHWEST) P/E ratio to inform your assessment of the investment opportunity. South West Pinnacle Exploration has a P/E ratio of 4.38, based on the last twelve months. That is equivalent to an earnings yield of about 23%.
Check out our latest analysis for South West Pinnacle Exploration
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for South West Pinnacle Exploration:
P/E of 4.38 = ₹14.85 ÷ ₹3.39 (Based on the year to March 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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.
How Does South West Pinnacle Exploration's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that South West Pinnacle Exploration has a lower P/E than the average (8) P/E for companies in the metals and mining industry.
South West Pinnacle Exploration's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with South West Pinnacle Exploration, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
South West Pinnacle Exploration shrunk earnings per share by 27% over the last year. But it has grown its earnings per share by 16% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. 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.