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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Renaissance Global Limited's (NSE:RGL) P/E ratio and reflect on what it tells us about the company's share price. Renaissance Global has a price to earnings ratio of 6.03, based on the last twelve months. That means that at current prices, buyers pay ₹6.03 for every ₹1 in trailing yearly profits.
Check out our latest analysis for Renaissance Global
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 Renaissance Global:
P/E of 6.03 = ₹270 ÷ ₹44.79 (Based on the year to March 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each ₹1 of company earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in 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. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
Renaissance Global increased earnings per share by a whopping 31% last year. And earnings per share have improved by 24% annually, over the last five years. So we'd generally expect it to have a relatively high P/E ratio.
How Does Renaissance Global'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 Renaissance Global has a lower P/E than the average (11) P/E for companies in the luxury industry.
Renaissance Global's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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).