This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Mittal Life Style Limited’s (NSE:MITTAL) P/E ratio and reflect on what it tells us about the company’s share price. Mittal Life Style has a P/E ratio of 19.41, based on the last twelve months. That corresponds to an earnings yield of approximately 5.2%.
See our latest analysis for Mittal Life Style
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 Mittal Life Style:
P/E of 19.41 = ₹36.65 ÷ ₹1.89 (Based on the trailing twelve months to March 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the ‘E’ will be higher. 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.
Mittal Life Style increased earnings per share by a whopping 95% last year. And earnings per share have improved by 73% annually, over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does Mittal Life Style’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Mittal Life Style has a lower P/E than the average (37) P/E for companies in the retail distributors industry.
Mittal Life Style’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Mittal Life Style, it’s quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.