This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Globe Textiles (India) Ltd.’s (NSE:GLOBE) P/E ratio could help you assess the value on offer. Globe Textiles (India) has a price to earnings ratio of 8.68, based on the last twelve months. That corresponds to an earnings yield of approximately 12%.
See our latest analysis for Globe Textiles (India)
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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 Globe Textiles (India):
P/E of 8.68 = ₹29.45 ÷ ₹3.39 (Based on the year to March 2018.)
Is A High P/E 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
Earnings growth rates have a big influence on P/E ratios. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
Globe Textiles (India) saw earnings per share decrease by 13% last year. But EPS is up 2.4% over the last 5 years.
How Does Globe Textiles (India)’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Globe Textiles (India) has a lower P/E than the average (13) in the luxury industry classification.
Its relatively low P/E ratio indicates that Globe Textiles (India) shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Globe Textiles (India), it’s quite possible it could surprise on the upside. 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. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.