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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 apply a basic P/E ratio analysis to Shreyans Industries Limited's (NSE:SHREYANIND), to help you decide if the stock is worth further research. Based on the last twelve months, Shreyans Industries's P/E ratio is 4.88. That is equivalent to an earnings yield of about 20%.
See our latest analysis for Shreyans Industries
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Shreyans Industries:
P/E of 4.88 = ₹144.85 ÷ ₹29.68 (Based on the trailing twelve months to December 2018.)
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. 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
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Shreyans Industries's earnings made like a rocket, taking off 64% last year. The sweetener is that the annual five year growth rate of 30% is also impressive. So I'd be surprised if the P/E ratio was not above average.
Does Shreyans Industries Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see Shreyans Industries has a lower P/E than the average (11) in the forestry industry classification.
This suggests that market participants think Shreyans Industries will underperform other companies in its industry. Since the market seems unimpressed with Shreyans Industries, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).