This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Public Joint-Stock North-Western Shipping Company's (MCX:SZPR) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, North-Western Shipping has a P/E ratio of 2.82. That is equivalent to an earnings yield of about 35%.
Check out our latest analysis for North-Western Shipping
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for North-Western Shipping:
P/E of 2.82 = RUB786 ÷ RUB278.37 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does North-Western Shipping's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see North-Western Shipping has a lower P/E than the average (11.4) in the shipping industry classification.
Its relatively low P/E ratio indicates that North-Western Shipping shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with North-Western Shipping, 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
North-Western Shipping's earnings made like a rocket, taking off 126% last year. The sweetener is that the annual five year growth rate of 41% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.