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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 apply a basic P/E ratio analysis to SPL Industries Limited's (NSE:SPLIL), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, SPL Industries has a P/E ratio of 4.4. That corresponds to an earnings yield of approximately 23%.
View our latest analysis for SPL Industries
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for SPL Industries:
P/E of 4.4 = ₹41.25 ÷ ₹9.37 (Based on the year 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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
SPL Industries's earnings made like a rocket, taking off 404% last year. The sweetener is that the annual five year growth rate of 58% is also impressive. So I'd be surprised if the P/E ratio was not above average.
How Does SPL Industries'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. We can see in the image below that the average P/E (10.7) for companies in the luxury industry is higher than SPL Industries's P/E.
Its relatively low P/E ratio indicates that SPL Industries shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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).