In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use DCM Shriram Limited’s (NSE:DCMSHRIRAM) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, DCM Shriram’s P/E ratio is 11.04. That means that at current prices, buyers pay ₹11.04 for every ₹1 in trailing yearly profits.
See our latest analysis for DCM Shriram
How Do I Calculate DCM Shriram’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for DCM Shriram:
P/E of 11.04 = ₹457 ÷ ₹41.41 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
DCM Shriram’s earnings per share fell by 13% in the last twelve months. But EPS is up 27% over the last 5 years.
How Does DCM Shriram’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (15.7) for companies in the chemicals industry is higher than DCM Shriram’s P/E.
DCM Shriram’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
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 DCM Shriram’s Debt Impact Its P/E Ratio?
Net debt totals just 4.1% of DCM Shriram’s market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.