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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Voltamp Transformers Limited's (NSE:VOLTAMP) P/E ratio to inform your assessment of the investment opportunity. Voltamp Transformers has a P/E ratio of 14.34, based on the last twelve months. That means that at current prices, buyers pay ₹14.34 for every ₹1 in trailing yearly profits.
View our latest analysis for Voltamp Transformers
How Do I Calculate Voltamp Transformers's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Voltamp Transformers:
P/E of 14.34 = ₹1202.65 ÷ ₹83.86 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Most would be impressed by Voltamp Transformers earnings growth of 15% in the last year. And earnings per share have improved by 26% annually, over the last five years. With that performance, you might expect an above average P/E ratio.
How Does Voltamp Transformers's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below Voltamp Transformers has a P/E ratio that is fairly close for the average for the electrical industry, which is 15.1.
Voltamp Transformers'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. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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).