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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Bharatiya Global Infomedia Limited's (NSE:BGLOBAL) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Bharatiya Global Infomedia's P/E ratio is 13.39. That corresponds to an earnings yield of approximately 7.5%.
See our latest analysis for Bharatiya Global Infomedia
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Bharatiya Global Infomedia:
P/E of 13.39 = ₹1.38 ÷ ₹0.10 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings 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. 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 Bharatiya Global Infomedia 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. You can see in the image below that the average P/E (12.3) for companies in the it industry is lower than Bharatiya Global Infomedia's P/E.
Bharatiya Global Infomedia'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
When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Bharatiya Global Infomedia increased earnings per share by an impressive 22% over the last twelve months. But earnings per share are down 32% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.