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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Gujarat Pipavav Port Limited's (NSE:GPPL), to help you decide if the stock is worth further research. What is Gujarat Pipavav Port's P/E ratio? Well, based on the last twelve months it is 18.17. In other words, at today's prices, investors are paying ₹18.17 for every ₹1 in prior year profit.
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Check out our latest analysis for Gujarat Pipavav Port
How Do You Calculate Gujarat Pipavav Port's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Gujarat Pipavav Port:
P/E of 18.17 = ₹88.65 ÷ ₹4.88 (Based on the trailing twelve months to March 2019.)
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. 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
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. 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.
Gujarat Pipavav Port's earnings per share grew by -6.7% in the last twelve months. And it has bolstered its earnings per share by 1.6% per year over the last five years.
How Does Gujarat Pipavav Port's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (14.2) for companies in the infrastructure industry is lower than Gujarat Pipavav Port's P/E.
Its relatively high P/E ratio indicates that Gujarat Pipavav Port 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 delve deeper. I like to check if company insiders have been buying or selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.