The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Ganga Forging Limited's (NSE:GANGAFORGE) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Ganga Forging has a P/E ratio of 26.32. That means that at current prices, buyers pay ₹26.32 for every ₹1 in trailing yearly profits.
View our latest analysis for Ganga Forging
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Ganga Forging:
P/E of 26.32 = ₹18.75 ÷ ₹0.71 (Based on the trailing twelve months 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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Does Ganga Forging's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Ganga Forging has a higher P/E than the average (8.9) P/E for companies in the metals and mining industry.
That means that the market expects Ganga Forging will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Ganga Forging shrunk earnings per share by 38% over the last year.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.