This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Vascon Engineers Limited’s (NSE:VASCONEQ) P/E ratio and reflect on what it tells us about the company’s share price. Vascon Engineers has a price to earnings ratio of 49.44, based on the last twelve months. That is equivalent to an earnings yield of about 2.0%.

Check out our latest analysis for Vascon Engineers

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Vascon Engineers:

P/E of 49.44 = ₹16.6 ÷ ₹0.34 (Based on the year to March 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. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

It’s nice to see that Vascon Engineers grew EPS by a stonking 169% in the last year. And its annual EPS growth rate over 5 years is 6.6%. So we’d generally expect it to have a relatively high P/E ratio.

How Does Vascon Engineers’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Vascon Engineers has a much higher P/E than the average company (14.7) in the construction industry.

That means that the market expects Vascon Engineers 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. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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).

Vascon Engineers’s Balance Sheet

Vascon Engineers’s net debt is 81% of its market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Bottom Line On Vascon Engineers’s P/E Ratio

Vascon Engineers’s P/E is 49.4 which is above average (16.8) in the IN market. While the meaningful level of debt does limit its options, it has achieved solid growth over the last year. The relatively high P/E ratio suggests shareholders think growth will continue.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. Although we don’t have analyst forecasts, you might want to assess this data-rich visualization of earnings, revenue and cash flow.

But note: Vascon Engineers may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.