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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 show how you can use Bhageria Industries Limited’s (NSE:BHAGIL) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Bhageria Industries’s P/E ratio is 6.71. That corresponds to an earnings yield of approximately 15%.
View our latest analysis for Bhageria Industries
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Bhageria Industries:
P/E of 6.71 = ₹220.95 ÷ ₹32.92 (Based on the year to December 2018.)
Is A High Price-to-Earnings 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 Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the ‘E’ will be higher. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Notably, Bhageria Industries grew EPS by a whopping 34% in the last year. And its annual EPS growth rate over 5 years is 16%. So we’d generally expect it to have a relatively high P/E ratio.
How Does Bhageria Industries’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Bhageria Industries has a lower P/E than the average (15.2) in the chemicals industry classification.
Bhageria Industries’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. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. 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).