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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 L.G. Balakrishnan & Bros Limited's (NSE:LGBBROSLTD), to help you decide if the stock is worth further research. What is L.G. Balakrishnan & Bros's P/E ratio? Well, based on the last twelve months it is 6.87. That corresponds to an earnings yield of approximately 15%.
See our latest analysis for L.G. Balakrishnan & Bros
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for L.G. Balakrishnan & Bros:
P/E of 6.87 = ₹217.85 ÷ ₹31.72 (Based on the year to March 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each ₹1 of company earnings. 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 Does L.G. Balakrishnan & Bros'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 L.G. Balakrishnan & Bros has a lower P/E than the average (13.1) in the machinery industry classification.
Its relatively low P/E ratio indicates that L.G. Balakrishnan & Bros shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
L.G. Balakrishnan & Bros increased earnings per share by an impressive 16% over the last twelve months. And it has bolstered its earnings per share by 9.6% per year over the last five years. With that performance, you might expect an above average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.