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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Hisar Metal Industries Limited's (NSE:HISARMET) P/E ratio to inform your assessment of the investment opportunity. What is Hisar Metal Industries's P/E ratio? Well, based on the last twelve months it is 6.34. In other words, at today's prices, investors are paying ₹6.34 for every ₹1 in prior year profit.
Check out our latest analysis for Hisar Metal Industries
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 Hisar Metal Industries:
P/E of 6.34 = ₹56.5 ÷ ₹8.91 (Based on the year to December 2018.)
Is A High Price-to-Earnings 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 isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Hisar Metal Industries saw earnings per share decrease by 1.1% last year. But EPS is up 27% over the last 5 years.
Does Hisar Metal Industries Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Hisar Metal Industries has a lower P/E than the average (10.1) P/E for companies in the metals and mining industry.
This suggests that market participants think Hisar Metal Industries will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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).