In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Kingfa Science & Technology (India) Limited's (NSE:KINGFA) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Kingfa Science & Technology (India)'s P/E ratio is 26.84. That means that at current prices, buyers pay ₹26.84 for every ₹1 in trailing yearly profits.
Check out our latest analysis for Kingfa Science & Technology (India)
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Kingfa Science & Technology (India):
P/E of 26.84 = ₹638.25 ÷ ₹23.78 (Based on the trailing twelve months to June 2019.)
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 Does Kingfa Science & Technology (India)'s P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Kingfa Science & Technology (India) has a higher P/E than the average (11.2) P/E for companies in the chemicals industry.
Its relatively high P/E ratio indicates that Kingfa Science & Technology (India) shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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. 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 Kingfa Science & Technology (India) grew EPS by a stonking 32% in the last year. And it has improved its earnings per share by 15% per year over the last three years. So we'd generally expect it to have a relatively high P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.