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 Sudarshan Chemical Industries Limited’s (NSE:SUDARSCHEM) P/E ratio and reflect on what it tells us about the company’s share price. Sudarshan Chemical Industries has a price to earnings ratio of 30.4, based on the last twelve months. That means that at current prices, buyers pay ₹30.4 for every ₹1 in trailing yearly profits.
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How Do I Calculate Sudarshan Chemical Industries’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Sudarshan Chemical Industries:
P/E of 30.4 = ₹343.4 ÷ ₹11.29 (Based on the year to March 2018.)
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. 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
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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Sudarshan Chemical Industries shrunk earnings per share by 15% over the last year. But over the longer term (5 years) earnings per share have increased by 23%.
How Does Sudarshan Chemical Industries’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (16.2) for companies in the chemicals industry is lower than Sudarshan Chemical Industries’s P/E.
That means that the market expects Sudarshan Chemical Industries will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.