The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Palash Securities Limited's (NSE:PALASHSEC) P/E ratio and reflect on what it tells us about the company's share price. Palash Securities has a P/E ratio of 7.85, based on the last twelve months. That means that at current prices, buyers pay ₹7.85 for every ₹1 in trailing yearly profits.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Check out our latest analysis for Palash Securities
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Palash Securities:
P/E of 7.85 = ₹43.95 ÷ ₹5.6 (Based on the trailing twelve months to March 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 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Most would be impressed by Palash Securities earnings growth of 11% in the last year.
Does Palash Securities Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Palash Securities has a lower P/E than the average (17.5) P/E for companies in the food industry.
This suggests that market participants think Palash Securities will underperform other companies in its industry. Since the market seems unimpressed with Palash Securities, 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.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.