Here's What Gufic Biosciences Limited's (NSE:GUFICBIO) P/E Is Telling Us

Simply Wall St

Thu, Jun 6, 2019, 9:09 PM

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how Gufic Biosciences Limited's (NSE:GUFICBIO) P/E ratio could help you assess the value on offer. What is Gufic Biosciences's P/E ratio? Well, based on the last twelve months it is 27.04. In other words, at today's prices, investors are paying ₹27.04 for every ₹1 in prior year profit.

View our latest analysis for Gufic Biosciences

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 Gufic Biosciences:

P/E of 27.04 = ₹75.7 ÷ ₹2.8 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each ₹1 of company earnings. 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. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Notably, Gufic Biosciences grew EPS by a whopping 35% in the last year. And its annual EPS growth rate over 5 years is 38%. So we'd generally expect it to have a relatively high P/E ratio.

How Does Gufic Biosciences's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Gufic Biosciences has a higher P/E than the average (19.2) P/E for companies in the pharmaceuticals industry.

NSEI:GUFICBIO Price Estimation Relative to Market, June 7th 2019

Its relatively high P/E ratio indicates that Gufic Biosciences shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors 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

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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.