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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 Wendt (India) Limited's (NSE:WENDT) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Wendt (India)'s P/E ratio is 32.43. That means that at current prices, buyers pay ₹32.43 for every ₹1 in trailing yearly profits.
View our latest analysis for Wendt (India)
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Wendt (India):
P/E of 32.43 = ₹2499 ÷ ₹77.07 (Based on the year to March 2019.)
Is A High P/E 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.
How Does Wendt (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. You can see in the image below that the average P/E (13.8) for companies in the machinery industry is lower than Wendt (India)'s P/E.
Its relatively high P/E ratio indicates that Wendt (India) 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 always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Wendt (India) increased earnings per share by an impressive 17% over the last twelve months. And earnings per share have improved by 5.7% annually, over the last five years. This could arguably justify a relatively high P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. 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).