In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Action Construction Equipment Limited’s (NSE:ACE) P/E ratio could help you assess the value on offer. Based on the last twelve months, Action Construction Equipment’s P/E ratio is 20.32. In other words, at today’s prices, investors are paying ₹20.32 for every ₹1 in prior year profit.
See our latest analysis for Action Construction Equipment
How Do You Calculate Action Construction Equipment’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Action Construction Equipment:
P/E of 20.32 = ₹92.5 ÷ ₹4.55 (Based on the trailing twelve months 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. 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
Earnings growth rates have a big influence on P/E ratios. 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.
Notably, Action Construction Equipment grew EPS by a whopping 248% in the last year. And its annual EPS growth rate over 5 years is 43%. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does Action Construction Equipment’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below Action Construction Equipment has a P/E ratio that is fairly close for the average for the machinery industry, which is 19.6.
Action Construction Equipment’s P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).