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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Deepak Fertilisers And Petrochemicals Corporation Limited’s (NSE:DEEPAKFERT) P/E ratio could help you assess the value on offer. Deepak Fertilisers And Petrochemicals has a P/E ratio of 9.02, based on the last twelve months. That means that at current prices, buyers pay ₹9.02 for every ₹1 in trailing yearly profits.
View our latest analysis for Deepak Fertilisers And Petrochemicals
How Do You Calculate Deepak Fertilisers And Petrochemicals’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Deepak Fertilisers And Petrochemicals:
P/E of 9.02 = ₹145.9 ÷ ₹16.18 (Based on the year to September 2018.)
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. 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
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Deepak Fertilisers And Petrochemicals saw earnings per share decrease by 24% last year.
How Does Deepak Fertilisers And Petrochemicals’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Deepak Fertilisers And Petrochemicals has a lower P/E than the average (16.3) in the chemicals industry classification.
Deepak Fertilisers And Petrochemicals’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.