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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Dhunseri Tea & Industries Limited's (NSE:DHUNTEAIND) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Dhunseri Tea & Industries's P/E ratio is 4.66. In other words, at today's prices, investors are paying ₹4.66 for every ₹1 in prior year profit.
View our latest analysis for Dhunseri Tea & Industries
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Dhunseri Tea & Industries:
P/E of 4.66 = ₹187.1 ÷ ₹40.12 (Based on the trailing twelve months to March 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 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. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Dhunseri Tea & Industries saw earnings per share decrease by 3.1% last year. But it has grown its earnings per share by 118% per year over the last five years.
Does Dhunseri Tea & Industries 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. If you look at the image below, you can see Dhunseri Tea & Industries has a lower P/E than the average (17) in the food industry classification.
This suggests that market participants think Dhunseri Tea & Industries will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, 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. 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 investing in growth. That means taking on debt (or spending its cash).