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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Rane Brake Lining Limited's (NSE:RBL) P/E ratio and reflect on what it tells us about the company's share price. Rane Brake Lining has a P/E ratio of 14.04, based on the last twelve months. That is equivalent to an earnings yield of about 7.1%.
See our latest analysis for Rane Brake Lining
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Rane Brake Lining:
P/E of 14.04 = ₹647.8 ÷ ₹46.15 (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
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.
Rane Brake Lining's earnings per share grew by -2.2% in the last twelve months. And its annual EPS growth rate over 5 years is 16%.
Does Rane Brake Lining Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see Rane Brake Lining has a lower P/E than the average (15.5) in the auto components industry classification.
Its relatively low P/E ratio indicates that Rane Brake Lining shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Rane Brake Lining, it's quite possible it could surprise on the upside. 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
Don't forget that the P/E ratio considers market capitalization. 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.