Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Mahickra Chemicals Limited's (NSE:MAHICKRA) P/E ratio could help you assess the value on offer. Mahickra Chemicals has a price to earnings ratio of 20.89, based on the last twelve months. That means that at current prices, buyers pay ₹20.89 for every ₹1 in trailing yearly profits.
View our latest analysis for Mahickra Chemicals
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Mahickra Chemicals:
P/E of 20.89 = ₹59.95 ÷ ₹2.87 (Based on the year to March 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Does Mahickra Chemicals'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, Mahickra Chemicals has a higher P/E than the average company (11.2) in the chemicals industry.
Mahickra Chemicals's P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. 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.
Mahickra Chemicals's 75% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. The sweetener is that the annual five year growth rate of 40% is also impressive. So I'd be surprised if the P/E ratio was not above average.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. 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.