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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how Bharat Dynamics Limited's (NSE:BDL) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Bharat Dynamics has a P/E ratio of 12.6. That is equivalent to an earnings yield of about 7.9%.
See our latest analysis for Bharat Dynamics
How Do You Calculate Bharat Dynamics's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Bharat Dynamics:
P/E of 12.6 = ₹290.65 ÷ ₹23.06 (Based on the trailing twelve months to March 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each ₹1 the company has earned over the last year. 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 Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Bharat Dynamics's earnings per share fell by 13% in the last twelve months. But it has grown its earnings per share by 14% per year over the last five years.
Does Bharat Dynamics 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. The image below shows that Bharat Dynamics has a P/E ratio that is roughly in line with the aerospace & defense industry average (13.3).
Its P/E ratio suggests that Bharat Dynamics shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Bharat Dynamics actually outperforms its peers going forward, that should be a positive for the share price. I inform my view byby checking management tenure and remuneration, among other things.
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. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).