In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Heritage Foods Limited's (NSE:HERITGFOOD) P/E ratio and reflect on what it tells us about the company's share price. Heritage Foods has a P/E ratio of 18.73, based on the last twelve months. That corresponds to an earnings yield of approximately 5.3%.
See our latest analysis for Heritage Foods
How Do I Calculate Heritage Foods's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Heritage Foods:
P/E of 18.73 = ₹325.55 ÷ ₹17.38 (Based on the year to June 2019.)
Is A High P/E 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.
Does Heritage Foods Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (13.9) for companies in the food industry is lower than Heritage Foods's P/E.
That means that the market expects Heritage Foods 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.
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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Heritage Foods increased earnings per share by an impressive 24% over the last twelve months. And it has bolstered its earnings per share by 18% per year over the last five years. So one might expect an above average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.