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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to KEI Industries Limited's (NSE:KEI), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, KEI Industries has a P/E ratio of 20.87. In other words, at today's prices, investors are paying ₹20.87 for every ₹1 in prior year profit.

View our latest analysis for KEI Industries

How Do I Calculate KEI Industries's Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for KEI Industries:

P/E of 20.87 = ₹479.6 ÷ ₹22.98 (Based on the year to March 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each ₹1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

KEI Industries increased earnings per share by an impressive 24% over the last twelve months. And its annual EPS growth rate over 5 years is 71%. This could arguably justify a relatively high P/E ratio.

How Does KEI Industries's P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below, KEI Industries has a higher P/E than the average company (12.4) in the electrical industry.

That means that the market expects KEI Industries will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.