In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Confidence Petroleum India Limited's (NSE:CONFIPET) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Confidence Petroleum India's P/E ratio is 12.62. That means that at current prices, buyers pay ₹12.62 for every ₹1 in trailing yearly profits.
See our latest analysis for Confidence Petroleum India
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Confidence Petroleum India:
P/E of 12.62 = ₹31.35 ÷ ₹2.49 (Based on the year to June 2019.)
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.
Does Confidence Petroleum India 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. The image below shows that Confidence Petroleum India has a P/E ratio that is roughly in line with the machinery industry average (13.3).
Confidence Petroleum India's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Confidence Petroleum India actually outperforms its peers going forward, that should be a positive for the share price. 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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
In the last year, Confidence Petroleum India grew EPS like Taylor Swift grew her fan base back in 2010; the 80% gain was both fast and well deserved. The cherry on top is that the five year growth rate was an impressive 118% per year. So I'd be surprised if the P/E ratio was not above average.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.