In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Reliance Industrial Infrastructure Limited's (NSE:RIIL), to help you decide if the stock is worth further research. Reliance Industrial Infrastructure has a P/E ratio of 43.53, based on the last twelve months. That is equivalent to an earnings yield of about 2.3%.
Check out our latest analysis for Reliance Industrial Infrastructure
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Reliance Industrial Infrastructure:
P/E of 43.53 = ₹268.55 ÷ ₹6.17 (Based on the trailing twelve months to March 2019.)
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. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
How Does Reliance Industrial Infrastructure's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Reliance Industrial Infrastructure has a significantly higher P/E than the average (11.4) P/E for companies in the oil and gas industry.
Reliance Industrial Infrastructure's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Reliance Industrial Infrastructure's earnings per share fell by 14% in the last twelve months. And it has shrunk its earnings per share by 17% per year over the last five years. This could justify a pessimistic P/E.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.