In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at ITD Cementation India Limited’s (NSE:ITDCEM) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, ITD Cementation India’s P/E ratio is 19.84. That means that at current prices, buyers pay ₹19.84 for every ₹1 in trailing yearly profits.
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How Do I Calculate ITD Cementation India’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for ITD Cementation India:
P/E of 19.84 = ₹120.3 ÷ ₹6.06 (Based on the trailing twelve months to September 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. 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
P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
ITD Cementation India increased earnings per share by a whopping 46% last year. And earnings per share have improved by 48% annually, over the last five years. So we’d generally expect it to have a relatively high P/E ratio.
How Does ITD Cementation India’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (14.4) for companies in the construction industry is lower than ITD Cementation India’s P/E.
Its relatively high P/E ratio indicates that ITD Cementation India shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. 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 taking on debt (or spending its remaining cash).