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 Berger Paints India Limited’s (NSE:BERGEPAINT) P/E ratio to inform your assessment of the investment opportunity. Berger Paints India has a P/E ratio of 59.53, based on the last twelve months. That means that at current prices, buyers pay ₹59.53 for every ₹1 in trailing yearly profits.

Check out our latest analysis for Berger Paints India

How Do I Calculate Berger Paints India’s Price To Earnings Ratio?

The formula for P/E is:

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

Or for Berger Paints India:

P/E of 59.53 = ₹302.15 ÷ ₹5.08 (Based on the year to December 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each ₹1 of company earnings. 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. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

Berger Paints India saw earnings per share improve by -7.1% last year. And its annual EPS growth rate over 5 years is 16%.

How Does Berger Paints India’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. As you can see below, Berger Paints India has a much higher P/E than the average company (15.5) in the chemicals industry.

That means that the market expects Berger Paints India will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.

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. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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).