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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Parin Furniture Limited's (NSE:PARIN), to help you decide if the stock is worth further research. What is Parin Furniture's P/E ratio? Well, based on the last twelve months it is 15.57. In other words, at today's prices, investors are paying ₹15.57 for every ₹1 in prior year profit.
View our latest analysis for Parin Furniture
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 Parin Furniture:
P/E of 15.57 = ₹66.5 ÷ ₹4.27 (Based on the year 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. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Parin Furniture's earnings per share fell by 33% in the last twelve months. And it has shrunk its earnings per share by 7.6% per year over the last five years. This might lead to muted expectations.
Does Parin Furniture Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Parin Furniture has a lower P/E than the average (25.3) in the commercial services industry classification.
This suggests that market participants think Parin Furniture will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. 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).