In This Article:
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 Johnson Controls-Hitachi Air Conditioning India Limited's (NSE:JCHAC), to help you decide if the stock is worth further research. Johnson Controls-Hitachi Air Conditioning India has a P/E ratio of 62.12, based on the last twelve months. In other words, at today's prices, investors are paying ₹62.12 for every ₹1 in prior year profit.
See our latest analysis for Johnson Controls-Hitachi Air Conditioning India
How Do You Calculate Johnson Controls-Hitachi Air Conditioning India's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Johnson Controls-Hitachi Air Conditioning India:
P/E of 62.12 = ₹1922.2 ÷ ₹30.94 (Based on the year 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
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
Johnson Controls-Hitachi Air Conditioning India shrunk earnings per share by 1.2% last year. But it has grown its earnings per share by 60% per year over the last five years.
Does Johnson Controls-Hitachi Air Conditioning India 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. You can see in the image below that the average P/E (27.7) for companies in the consumer durables industry is lower than Johnson Controls-Hitachi Air Conditioning India's P/E.
That means that the market expects Johnson Controls-Hitachi Air Conditioning India will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors 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
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.