Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Borosil Glass Works Limited's (NSE:BOROSIL) P/E ratio and reflect on what it tells us about the company's share price. What is Borosil Glass Works's P/E ratio? Well, based on the last twelve months it is 26.21. That means that at current prices, buyers pay ₹26.21 for every ₹1 in trailing yearly profits.

Check out our latest analysis for Borosil Glass Works

How Do You Calculate Borosil Glass Works's P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Borosil Glass Works:

P/E of 26.21 = ₹129.5 ÷ ₹4.94 (Based on the year 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 Borosil Glass Works Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (22) for companies in the consumer durables industry is lower than Borosil Glass Works's P/E.

That means that the market expects Borosil Glass Works will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Borosil Glass Works maintained roughly steady earnings over the last twelve months. But it has grown its earnings per share by 8.6% per year over the last five years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

The 'Price' in P/E reflects the market capitalization of the company. 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.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Is Debt Impacting Borosil Glass Works's P/E?

Since Borosil Glass Works holds net cash of ₹145m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On Borosil Glass Works's P/E Ratio

Borosil Glass Works's P/E is 26.2 which is above average (13.3) in its market. Earnings improved over the last year. And the net cash position provides the company with multiple options. The high P/E suggests the market thinks further growth will come.

Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.