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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use K.C.P. Sugar and Industries Corporation Limited's (NSE:KCPSUGIND) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, K.C.P. Sugar and Industries has a P/E ratio of 9.83. That is equivalent to an earnings yield of about 10%.

Check out our latest analysis for K.C.P. Sugar and Industries

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for K.C.P. Sugar and Industries:

P/E of 9.83 = ₹14.15 ÷ ₹1.44 (Based on the trailing twelve months to March 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 K.C.P. Sugar and Industries's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see K.C.P. Sugar and Industries has a lower P/E than the average (16.2) in the food industry classification.

This suggests that market participants think K.C.P. Sugar and Industries will underperform other companies in its industry. Since the market seems unimpressed with K.C.P. Sugar and Industries, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. 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. Then, a lower P/E should attract more buyers, pushing the share price up.

K.C.P. Sugar and Industries increased earnings per share by a whopping 43% last year. And it has improved its earnings per share by 11% per year over the last three years. I'd therefore be a little surprised if its P/E ratio was not relatively high. Unfortunately, earnings per share are down 13% a year, over 5 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

K.C.P. Sugar and Industries's Balance Sheet

K.C.P. Sugar and Industries has net debt worth 69% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Bottom Line On K.C.P. Sugar and Industries's P/E Ratio

K.C.P. Sugar and Industries trades on a P/E ratio of 9.8, which is below the IN market average of 14.7. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don't have analyst forecasts, you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: K.C.P. Sugar and Industries may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.