Here’s How P/E Ratios Can Help Us Understand Mangalore Chemicals & Fertilizers Limited (NSE:MANGCHEFER)

Daisy Mock

Mon, Jan 21, 2019, 5:47 PM

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Mangalore Chemicals & Fertilizers Limited’s (NSE:MANGCHEFER) P/E ratio and reflect on what it tells us about the company’s share price. Mangalore Chemicals & Fertilizers has a P/E ratio of 7.36, based on the last twelve months. That means that at current prices, buyers pay ₹7.36 for every ₹1 in trailing yearly profits.

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How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Mangalore Chemicals & Fertilizers:

P/E of 7.36 = ₹42.5 ÷ ₹5.77 (Based on the trailing twelve months 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. Then, a lower P/E should attract more buyers, pushing the share price up.

It’s nice to see that Mangalore Chemicals & Fertilizers grew EPS by a stonking 130% in the last year. And its annual EPS growth rate over 3 years is 103%. With that performance, I would expect it to have an above average P/E ratio. Unfortunately, earnings per share are down 1.8% a year, over 5 years.

How Does Mangalore Chemicals & Fertilizers’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (16.1) for companies in the chemicals industry is higher than Mangalore Chemicals & Fertilizers’s P/E.

NSEI:MANGCHEFER PE PEG Gauge January 22nd 19

Mangalore Chemicals & Fertilizers’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. 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. That means it doesn’t take debt or cash into account. 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).

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

How Does Mangalore Chemicals & Fertilizers’s Debt Impact Its P/E Ratio?

Mangalore Chemicals & Fertilizers has net debt worth a very significant 169% of its market capitalization. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you’re comparing it to other stocks.

The Bottom Line On Mangalore Chemicals & Fertilizers’s P/E Ratio

Mangalore Chemicals & Fertilizers’s P/E is 7.4 which is below average (17.1) in the IN market. The company may have significant debt, but EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don’t have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: Mangalore Chemicals & Fertilizers may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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