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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 show how you can use Puravankara Limited's (NSE:PURVA) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Puravankara has a P/E ratio of 18.03. That corresponds to an earnings yield of approximately 5.5%.
View our latest analysis for Puravankara
How Do You Calculate Puravankara's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Puravankara:
P/E of 18.03 = ₹76.15 ÷ ₹4.22 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Puravankara saw earnings per share decrease by 21% last year. But it has grown its earnings per share by 9.3% per year over the last three years. And over the longer term (5 years) earnings per share have decreased 15% annually. This growth rate might warrant a below average P/E ratio.
How Does Puravankara's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Puravankara has a higher P/E than the average (16.4) P/E for companies in the real estate industry.
Puravankara's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).