In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Sunteck Realty Limited's (NSE:SUNTECK) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Sunteck Realty's P/E ratio is 31.65. That is equivalent to an earnings yield of about 3.2%.
View our latest analysis for Sunteck Realty
How Do I Calculate Sunteck Realty'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 Sunteck Realty:
P/E of 31.65 = ₹434.50 ÷ ₹13.73 (Based on the year to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each ₹1 the company has earned over the last year. 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 Does Sunteck Realty's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Sunteck Realty has a higher P/E than the average company (17.5) in the real estate industry.
Sunteck Realty's P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Sunteck Realty's earnings per share fell by 26% in the last twelve months. But it has grown its earnings per share by 2.4% per year over the last five years. And EPS is down 8.6% a year, over the last 3 years. This might lead to low expectations.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
Sunteck Realty's Balance Sheet
The extra options and safety that comes with Sunteck Realty's ₹303m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.