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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 Dalmia Bharat Limited's (NSE:DALBHARAT) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Dalmia Bharat has a P/E ratio of 40.21. That is equivalent to an earnings yield of about 2.5%.
View our latest analysis for Dalmia Bharat
How Do You Calculate Dalmia Bharat's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Dalmia Bharat:
P/E of 40.21 = ₹837.95 ÷ ₹20.84 (Based on the trailing twelve months to June 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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
Does Dalmia Bharat Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. As you can see below, Dalmia Bharat has a higher P/E than the average company (21.4) in the basic materials industry.
That means that the market expects Dalmia Bharat will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
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. Then, a higher P/E might scare off shareholders, pushing the share price down.
It's nice to see that Dalmia Bharat grew EPS by a stonking 33% in the last year. And earnings per share have improved by 2.0% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio. In contrast, EPS has decreased by 21%, annually, over 3 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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).
Dalmia Bharat's Balance Sheet
Dalmia Bharat's net debt is 9.7% of its market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.