In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use The Phoenix Mills Limited’s (NSE:PHOENIXLTD) P/E ratio to inform your assessment of the investment opportunity. Phoenix Mills has a price to earnings ratio of 33.88, based on the last twelve months. In other words, at today’s prices, investors are paying ₹33.88 for every ₹1 in prior year profit.
See our latest analysis for Phoenix Mills
How Do You Calculate Phoenix Mills’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Phoenix Mills:
P/E of 33.88 = ₹618.6 ÷ ₹18.26 (Based on the year to September 2018.)
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. 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
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. 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.
Phoenix Mills increased earnings per share by a whopping 80% last year. And its annual EPS growth rate over 5 years is 27%. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does Phoenix Mills’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (18.3) for companies in the real estate industry is lower than Phoenix Mills’s P/E.
That means that the market expects Phoenix Mills will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).