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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Vera Synthetic Limited's (NSE:VERA) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Vera Synthetic has a P/E ratio of 29.93. That means that at current prices, buyers pay ₹29.93 for every ₹1 in trailing yearly profits.
See our latest analysis for Vera Synthetic
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Vera Synthetic:
P/E of 29.93 = ₹85 ÷ ₹2.84 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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.
Does Vera Synthetic 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. The image below shows that Vera Synthetic has a higher P/E than the average (10.8) P/E for companies in the luxury industry.
Its relatively high P/E ratio indicates that Vera Synthetic shareholders think it will perform better than other companies in its industry classification. 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.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.
Vera Synthetic saw earnings per share decrease by 3.1% last year. But EPS is up 25% over the last 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. 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.