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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Alembic Pharmaceuticals Limited's (NSE:APLLTD) P/E ratio to inform your assessment of the investment opportunity. What is Alembic Pharmaceuticals's P/E ratio? Well, based on the last twelve months it is 15.69. That corresponds to an earnings yield of approximately 6.4%.
View our latest analysis for Alembic Pharmaceuticals
How Do I Calculate Alembic Pharmaceuticals's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Alembic Pharmaceuticals:
P/E of 15.69 = ₹513.85 ÷ ₹32.76 (Based on the year to June 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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.
Does Alembic Pharmaceuticals Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (16.3) for companies in the pharmaceuticals industry is roughly the same as Alembic Pharmaceuticals's P/E.
Alembic Pharmaceuticals's P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
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. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Notably, Alembic Pharmaceuticals grew EPS by a whopping 42% in the last year. And its annual EPS growth rate over 5 years is 19%. With that performance, I would expect it to have an above average P/E ratio. Unfortunately, earnings per share are down 6.4% a year, over 3 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. 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.