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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 Strides Pharma Science Limited's (NSE:STAR) P/E ratio to inform your assessment of the investment opportunity. What is Strides Pharma Science's P/E ratio? Well, based on the last twelve months it is 71.89. In other words, at today's prices, investors are paying ₹71.89 for every ₹1 in prior year profit.
Check out our latest analysis for Strides Pharma Science
How Do You Calculate Strides Pharma Science's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Strides Pharma Science:
P/E of 71.89 = ₹430.85 ÷ ₹5.99 (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. 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.'
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Strides Pharma Science's earnings per share grew by -6.5% in the last twelve months. In contrast, EPS has decreased by 28%, annually, over 3 years.
Does Strides Pharma Science Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Strides Pharma Science has a much higher P/E than the average company (18.8) in the pharmaceuticals industry.
Strides Pharma Science's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
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.