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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 show how you can use Ruchira Papers Limited’s (NSE:RUCHIRA) P/E ratio to inform your assessment of the investment opportunity. Ruchira Papers has a price to earnings ratio of 5.95, based on the last twelve months. That is equivalent to an earnings yield of about 17%.
View our latest analysis for Ruchira Papers
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Ruchira Papers:
P/E of 5.95 = ₹93.1 ÷ ₹15.64 (Based on the year to December 2018.)
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 a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the ‘E’ will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Ruchira Papers shrunk earnings per share by 15% over the last year. But EPS is up 26% over the last 5 years.
How Does Ruchira Papers’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (11.8) for companies in the forestry industry is higher than Ruchira Papers’s P/E.
This suggests that market participants think Ruchira Papers will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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).