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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 look at Phillips Carbon Black Limited's (NSE:PHILIPCARB) P/E ratio and reflect on what it tells us about the company's share price. Phillips Carbon Black has a P/E ratio of 11.35, based on the last twelve months. That corresponds to an earnings yield of approximately 8.8%.
See our latest analysis for Phillips Carbon Black
How Do You Calculate Phillips Carbon Black's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Phillips Carbon Black:
P/E of 11.35 = ₹150.75 ÷ ₹13.28 (Based on the trailing twelve months to March 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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
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. Then, a lower P/E should attract more buyers, pushing the share price up.
Phillips Carbon Black's earnings made like a rocket, taking off 230% last year. And earnings per share have improved by 141% annually, over the last three years. So we'd absolutely expect it to have a relatively high P/E ratio.
Does Phillips Carbon Black Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Phillips Carbon Black has a lower P/E than the average (15.1) P/E for companies in the chemicals industry.
Phillips Carbon Black'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 Phillips Carbon Black, 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.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.