Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Welspun India Limited's (NSE:WELSPUNIND) P/E ratio and reflect on what it tells us about the company's share price. Welspun India has a P/E ratio of 14.42, based on the last twelve months. That is equivalent to an earnings yield of about 6.9%.
Check out our latest analysis for Welspun India
How Do You Calculate Welspun India's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Welspun India:
P/E of 14.42 = ₹53.95 ÷ ₹3.74 (Based on the trailing twelve months to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Welspun India's earnings per share fell by 17% in the last twelve months. But EPS is up 39% over the last 5 years. And EPS is down 18% a year, over the last 3 years. This growth rate might warrant a low P/E ratio.
How Does Welspun India'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 Welspun India has a higher P/E than the average (11.9) P/E for companies in the luxury industry.
Its relatively high P/E ratio indicates that Welspun India 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.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. 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).
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Is Debt Impacting Welspun India's P/E?
Welspun India's net debt equates to 50% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.