In This Article:
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 Surana Solar Limited’s (NSE:SURANASOL) P/E ratio could help you assess the value on offer. Based on the last twelve months, Surana Solar’s P/E ratio is 40.07. In other words, at today’s prices, investors are paying ₹40.07 for every ₹1 in prior year profit.
Check out our latest analysis for Surana Solar
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Surana Solar:
P/E of 40.07 = ₹8.49 ÷ ₹0.21 (Based on the year to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each ₹1 the company has earned over the last year. 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
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Surana Solar’s earnings per share grew by -6.8% in the last twelve months. In contrast, EPS has decreased by 38%, annually, over 5 years.
How Does Surana Solar’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Surana Solar has a higher P/E than the average company (15) in the semiconductor industry.
That means that the market expects Surana Solar will outperform other companies in its industry. 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.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
Is Debt Impacting Surana Solar’s P/E?
Surana Solar’s net debt is 57% of its market cap. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.