In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at PG Electroplast Limited's (NSE:PGEL) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, PG Electroplast has a P/E ratio of 6.37. In other words, at today's prices, investors are paying ₹6.37 for every ₹1 in prior year profit.
Check out our latest analysis for PG Electroplast
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 PG Electroplast:
P/E of 6.37 = ₹42.90 ÷ ₹6.73 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Does PG Electroplast's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that PG Electroplast has a lower P/E than the average (13.6) P/E for companies in the electronic industry.
This suggests that market participants think PG Electroplast will underperform other companies in its industry. Since the market seems unimpressed with PG Electroplast, 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
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
It's nice to see that PG Electroplast grew EPS by a stonking 34% in the last year. And it has improved its earnings per share by 57% per year over the last three years. So we'd generally expect it to have a relatively high P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.