In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Praj Industries Limited’s (NSE:PRAJIND) P/E ratio and reflect on what it tells us about the company’s share price. Praj Industries has a P/E ratio of 42.22, based on the last twelve months. That means that at current prices, buyers pay ₹42.22 for every ₹1 in trailing yearly profits.
View our latest analysis for Praj Industries
How Do I Calculate Praj Industries’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Praj Industries:
P/E of 42.22 = ₹108.15 ÷ ₹2.56 (Based on the trailing twelve months 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 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
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
Praj Industries increased earnings per share by 7.0% last year. In contrast, EPS has decreased by 8.5%, annually, over 5 years.
How Does Praj Industries’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Praj Industries has a higher P/E than the average (14.7) P/E for companies in the construction industry.
Its relatively high P/E ratio indicates that Praj Industries shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn’t guarantee future growth. So further research is always essential. I often monitor director buying and selling.
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.
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.
Praj Industries’s Balance Sheet
The extra options and safety that comes with Praj Industries’s ₹2.7b net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.