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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to The United Nilgiri Tea Estates Company Limited's (NSE:UNITEDTEA), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, United Nilgiri Tea Estates has a P/E ratio of 10.54. That is equivalent to an earnings yield of about 9.5%.
View our latest analysis for United Nilgiri Tea Estates
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 United Nilgiri Tea Estates:
P/E of 10.54 = ₹303 ÷ ₹28.76 (Based on the trailing twelve months 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. 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 Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.
United Nilgiri Tea Estates increased earnings per share by an impressive 18% over the last twelve months. And earnings per share have improved by 13% annually, over the last five years. So one might expect an above average P/E ratio.
Does United Nilgiri Tea Estates Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (16.3) for companies in the food industry is higher than United Nilgiri Tea Estates's P/E.
United Nilgiri Tea Estates'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. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.