In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Swaraj Engines Limited's (NSE:SWARAJENG) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Swaraj Engines has a P/E ratio of 20.53. In other words, at today's prices, investors are paying ₹20.53 for every ₹1 in prior year profit.
View our latest analysis for Swaraj Engines
How Do You Calculate Swaraj Engines's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Swaraj Engines:
P/E of 20.53 = ₹1410.05 ÷ ₹68.69 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
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. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
Most would be impressed by Swaraj Engines earnings growth of 10% in the last year. And its annual EPS growth rate over 5 years is 6.1%. With that performance, you might expect an above average P/E ratio.
How Does Swaraj Engines's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (18.7) for companies in the machinery industry is lower than Swaraj Engines's P/E.
Swaraj Engines's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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).