In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Asahi Songwon Colors Limited’s (NSE:ASAHISONG) P/E ratio could help you assess the value on offer. Based on the last twelve months, Asahi Songwon Colors’s P/E ratio is 13. In other words, at today’s prices, investors are paying ₹13 for every ₹1 in prior year profit.
Check out our latest analysis for Asahi Songwon Colors
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Asahi Songwon Colors:
P/E of 13 = ₹222.65 ÷ ₹17.13 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each ₹1 of company 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 Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the ‘E’ will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Asahi Songwon Colors’s earnings per share fell by 22% in the last twelve months. But it has grown its earnings per share by 13% per year over the last five years.
How Does Asahi Songwon Colors’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (15.9) for companies in the chemicals industry is higher than Asahi Songwon Colors’s P/E.
Asahi Songwon Colors’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 Asahi Songwon Colors, 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.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
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 taking on debt (or spending its remaining cash).