In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Genus Paper & Boards Limited’s (NSE:GENUSPAPER) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Genus Paper & Boards’s P/E ratio is 16.37. That corresponds to an earnings yield of approximately 6.1%.
See our latest analysis for Genus Paper & Boards
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Genus Paper & Boards:
P/E of 16.37 = ₹9.51 ÷ ₹0.58 (Based on the year to September 2018.)
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.’
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. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It’s nice to see that Genus Paper & Boards grew EPS by a stonking 42% in the last year. And its annual EPS growth rate over 5 years is 21%. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does Genus Paper & Boards’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (14.7) for companies in the forestry industry is lower than Genus Paper & Boards’s P/E.
That means that the market expects Genus Paper & Boards will outperform other companies in its industry. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.