In This Article:
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 RPP Infra Projects Limited's (NSE:RPPINFRA), to help you decide if the stock is worth further research. What is RPP Infra Projects's P/E ratio? Well, based on the last twelve months it is 10.81. That is equivalent to an earnings yield of about 9.3%.
See our latest analysis for RPP Infra Projects
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for RPP Infra Projects:
P/E of 10.81 = ₹102.05 ÷ ₹9.44 (Based on the year to June 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does RPP Infra Projects Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (13.5) for companies in the construction industry is higher than RPP Infra Projects's P/E.
Its relatively low P/E ratio indicates that RPP Infra Projects shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with RPP Infra Projects, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
RPP Infra Projects increased earnings per share by a whopping 47% last year. And its annual EPS growth rate over 5 years is 9.5%. With that performance, I would expect it to have an above average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).