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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Rane Holdings Limited's (NSE:RANEHOLDIN) P/E ratio could help you assess the value on offer. Rane Holdings has a P/E ratio of 17.58, based on the last twelve months. That means that at current prices, buyers pay ₹17.58 for every ₹1 in trailing yearly profits.
See our latest analysis for Rane Holdings
How Do I Calculate Rane Holdings's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Rane Holdings:
P/E of 17.58 = ₹1308.25 ÷ ₹74.4 (Based on the trailing twelve months to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each ₹1 of company earnings. 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 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. 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.
Rane Holdings's earnings per share fell by 28% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 45%.
Does Rane Holdings Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, Rane Holdings has a higher P/E than the average company (16.2) in the auto components industry.
That means that the market expects Rane Holdings will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. 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
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.