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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Everest Kanto Cylinder Limited's (NSE:EKC) P/E ratio to inform your assessment of the investment opportunity. What is Everest Kanto Cylinder's P/E ratio? Well, based on the last twelve months it is 3.96. That is equivalent to an earnings yield of about 25%.
Check out our latest analysis for Everest Kanto Cylinder
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 Everest Kanto Cylinder:
P/E of 3.96 = ₹25.9 ÷ ₹6.54 (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 a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
In the last year, Everest Kanto Cylinder grew EPS like Taylor Swift grew her fan base back in 2010; the 174% gain was both fast and well deserved.
Does Everest Kanto Cylinder Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Everest Kanto Cylinder has a lower P/E than the average (9.6) P/E for companies in the packaging industry.
Its relatively low P/E ratio indicates that Everest Kanto Cylinder shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.