In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to IFGL Refractories Limited's (NSE:IFGLEXPOR), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, IFGL Refractories has a P/E ratio of 10.67. That corresponds to an earnings yield of approximately 9.4%.
View our latest analysis for IFGL Refractories
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for IFGL Refractories:
P/E of 10.67 = ₹149.4 ÷ ₹14 (Based on the year to March 2019.)
Is A High Price-to-Earnings 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. 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.'
Does IFGL Refractories 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. If you look at the image below, you can see IFGL Refractories has a lower P/E than the average (20.1) in the basic materials industry classification.
Its relatively low P/E ratio indicates that IFGL Refractories shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with IFGL Refractories, 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. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
IFGL Refractories's earnings per share grew by -7.1% in the last twelve months. In contrast, EPS has decreased by 2.7%, annually, over 5 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. 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).