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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Siyaram Silk Mills Limited's (NSE:SIYSIL) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Siyaram Silk Mills's P/E ratio is 14.33. In other words, at today's prices, investors are paying ₹14.33 for every ₹1 in prior year profit.
Check out our latest analysis for Siyaram Silk Mills
How Do You Calculate Siyaram Silk Mills's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Siyaram Silk Mills:
P/E of 14.33 = ₹303 ÷ ₹21.14 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each ₹1 of company earnings. 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 Siyaram Silk Mills'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 (10.6) for companies in the luxury industry is lower than Siyaram Silk Mills's P/E.
Its relatively high P/E ratio indicates that Siyaram Silk Mills shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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.
Siyaram Silk Mills shrunk earnings per share by 11% over the last year. But EPS is up 9.0% over the last 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. 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).