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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 ShreeOswal Seeds and Chemicals Limited's (NSE:OSWALSEEDS) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, ShreeOswal Seeds and Chemicals has a P/E ratio of 14.53. That corresponds to an earnings yield of approximately 6.9%.

See our latest analysis for ShreeOswal Seeds and Chemicals

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 ShreeOswal Seeds and Chemicals:

P/E of 14.53 = ₹26.3 ÷ ₹1.81 (Based on the year to March 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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 Does ShreeOswal Seeds and Chemicals's P/E Ratio Compare To Its Peers?

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 (16.2) for companies in the food industry is higher than ShreeOswal Seeds and Chemicals's P/E.

This suggests that market participants think ShreeOswal Seeds and Chemicals will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.

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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

ShreeOswal Seeds and Chemicals shrunk earnings per share by 60% over the last year. But EPS is up 45% over the last 5 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

How Does ShreeOswal Seeds and Chemicals's Debt Impact Its P/E Ratio?

Net debt is 50% of ShreeOswal Seeds and Chemicals's market cap. While that's enough to warrant consideration, it doesn't really concern us.

The Verdict On ShreeOswal Seeds and Chemicals's P/E Ratio

ShreeOswal Seeds and Chemicals trades on a P/E ratio of 14.5, which is fairly close to the IN market average of 14.7. With modest debt, and a lack of recent growth, it would seem the market is expecting improvement in earnings.

Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than ShreeOswal Seeds and Chemicals. So you may wish to see this free collection of other companies that have grown earnings strongly.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.