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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Sakuma Exports Limited's (NSE:SAKUMA) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Sakuma Exports's P/E ratio is 4.86. That is equivalent to an earnings yield of about 21%.
Check out our latest analysis for Sakuma Exports
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 Sakuma Exports:
P/E of 4.86 = ₹15.9 ÷ ₹3.27 (Based on the year to March 2019.)
Is A High Price-to-Earnings 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. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Does Sakuma Exports's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Sakuma Exports has a lower P/E than the average (21.6) P/E for companies in the consumer retailing industry.
Its relatively low P/E ratio indicates that Sakuma Exports shareholders think it will struggle to do as well as other companies in its industry classification. 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.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Most would be impressed by Sakuma Exports earnings growth of 25% in the last year. And earnings per share have improved by 27% annually, over the last five years. So one might expect an above average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. 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.