This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how TCNS Clothing Co. Limited’s (NSE:TCNSBRANDS) P/E ratio could help you assess the value on offer. Based on the last twelve months, TCNS Clothing’s P/E ratio is 38.37. That is equivalent to an earnings yield of about 2.6%.
See our latest analysis for TCNS Clothing
How Do You Calculate TCNS Clothing’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for TCNS Clothing:
P/E of 38.37 = ₹683.35 ÷ ₹17.81 (Based on the year 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. 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. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It’s nice to see that TCNS Clothing grew EPS by a stonking 89% in the last year. And its annual EPS growth rate over 5 years is 42%. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does TCNS Clothing’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that TCNS Clothing has a higher P/E than the average (13.2) P/E for companies in the luxury industry.
That means that the market expects TCNS Clothing 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. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.