In This Article:
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 Hikal Limited's (NSE:HIKAL) P/E ratio to inform your assessment of the investment opportunity. Hikal has a P/E ratio of 15.57, based on the last twelve months. That is equivalent to an earnings yield of about 6.4%.
View our latest analysis for Hikal
How Do You Calculate Hikal's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Hikal:
P/E of 15.57 = ₹142.05 ÷ ₹9.12 (Based on the trailing twelve months to June 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. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does Hikal's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (15.9) for companies in the pharmaceuticals industry is roughly the same as Hikal's P/E.
That indicates that the market expects Hikal will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.
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 even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Hikal increased earnings per share by a whopping 34% last year. And it has bolstered its earnings per share by 12% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
So What Does Hikal's Balance Sheet Tell Us?
Hikal has net debt equal to 35% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.