Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
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 JMC Projects (India) Limited's (NSE:JMCPROJECT) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, JMC Projects (India) has a P/E ratio of 30.41. That means that at current prices, buyers pay ₹30.41 for every ₹1 in trailing yearly profits.
View our latest analysis for JMC Projects (India)
How Do I Calculate JMC Projects (India)'s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for JMC Projects (India):
P/E of 30.41 = ₹138.65 ÷ ₹4.56 (Based on the year to March 2019.)
Is A High P/E 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. 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 Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
JMC Projects (India)'s 185% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive.
How Does JMC Projects (India)'s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (15.3) for companies in the construction industry is lower than JMC Projects (India)'s P/E.
Its relatively high P/E ratio indicates that JMC Projects (India) shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.