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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Rane Holdings Limited's (NSE:RANEHOLDIN) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Rane Holdings's P/E ratio is 15.29. That means that at current prices, buyers pay ₹15.29 for every ₹1 in trailing yearly profits.
Check out our latest analysis for Rane Holdings
How Do You Calculate Rane Holdings's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Rane Holdings:
P/E of 15.29 = ₹891.00 ÷ ₹58.28 (Based on the year to June 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. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does Rane Holdings'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 Rane Holdings has a P/E ratio that is fairly close for the average for the auto components industry, which is 14.6.
That indicates that the market expects Rane Holdings will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
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. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Rane Holdings shrunk earnings per share by 35% over the last year. But over the longer term (5 years) earnings per share have increased by 3.7%.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.