The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at PVR Limited's (NSE:PVR) P/E ratio and reflect on what it tells us about the company's share price. PVR has a P/E ratio of 50.53, based on the last twelve months. In other words, at today's prices, investors are paying ₹50.53 for every ₹1 in prior year profit.
Check out our latest analysis for PVR
How Do You Calculate PVR's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for PVR:
P/E of 50.53 = ₹1740.65 ÷ ₹34.45 (Based on the year to September 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. 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.
Does PVR Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, PVR has a higher P/E than the average company (30.2) in the entertainment industry.
That means that the market expects PVR will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. 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.
PVR increased earnings per share by an impressive 12% over the last twelve months. And earnings per share have improved by 35% annually, over the last five years. So one might expect an above average P/E ratio.
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. 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.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
How Does PVR's Debt Impact Its P/E Ratio?
PVR has net debt worth 14% of its market capitalization. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.