In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Indian Terrain Fashions Limited's (NSE:INDTERRAIN) P/E ratio could help you assess the value on offer. Indian Terrain Fashions has a P/E ratio of 10.96, based on the last twelve months. That means that at current prices, buyers pay ₹10.96 for every ₹1 in trailing yearly profits.
View our latest analysis for Indian Terrain Fashions
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Indian Terrain Fashions:
P/E of 10.96 = ₹73.05 ÷ ₹6.66 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each ₹1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does Indian Terrain Fashions's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below Indian Terrain Fashions has a P/E ratio that is fairly close for the average for the luxury industry, which is 10.2.
That indicates that the market expects Indian Terrain Fashions will perform roughly in line with other companies in its industry. So if Indian Terrain Fashions actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Indian Terrain Fashions shrunk earnings per share by 1.5% last year. But EPS is up 13% over the last 5 years. And EPS is down 8.2% a year, over the last 3 years. So we might expect a relatively low P/E.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).