Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Indiabulls Real Estate Limited's (NSE:IBREALEST), to help you decide if the stock is worth further research. What is Indiabulls Real Estate's P/E ratio? Well, based on the last twelve months it is 10.57. That is equivalent to an earnings yield of about 9.5%.

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See our latest analysis for Indiabulls Real Estate

How Do I Calculate Indiabulls Real Estate's Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Indiabulls Real Estate:

P/E of 10.57 = ₹116.65 ÷ ₹11.04 (Based on the trailing twelve months to March 2019.)

Is A High P/E 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. 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

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Indiabulls Real Estate saw earnings per share decrease by 74% last year. But it has grown its earnings per share by 16% per year over the last five years.

How Does Indiabulls Real Estate's P/E Ratio Compare To Its Peers?

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 Indiabulls Real Estate has a lower P/E than the average (16.2) P/E for companies in the real estate industry.

Its relatively low P/E ratio indicates that Indiabulls Real Estate shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Indiabulls Real Estate, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.