In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Shankara Building Products Limited's (NSE:SHANKARA) P/E ratio and reflect on what it tells us about the company's share price. Shankara Building Products has a price to earnings ratio of 41.04, based on the last twelve months. That corresponds to an earnings yield of approximately 2.4%.
Check out our latest analysis for Shankara Building Products
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Shankara Building Products:
P/E of 41.04 = ₹386.90 ÷ ₹9.43 (Based on the trailing twelve months to June 2019.)
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. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Does Shankara Building Products Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Shankara Building Products has a higher P/E than the average company (20.9) in the specialty retail industry.
Its relatively high P/E ratio indicates that Shankara Building Products shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. 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.
Shankara Building Products's earnings per share fell by 72% in the last twelve months. And it has shrunk its earnings per share by 6.4% per year over the last five years. This growth rate might warrant a below average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. 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).