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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Bajaj Consumer Care Limited's (NSE:BAJAJCON) P/E ratio could help you assess the value on offer. Bajaj Consumer Care has a price to earnings ratio of 16.77, based on the last twelve months. In other words, at today's prices, investors are paying ₹16.77 for every ₹1 in prior year profit.
See our latest analysis for Bajaj Consumer Care
How Do I Calculate Bajaj Consumer Care's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Bajaj Consumer Care:
P/E of 16.77 = ₹257.1 ÷ ₹15.33 (Based on the trailing twelve months to June 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 Does Bajaj Consumer Care'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 Bajaj Consumer Care has a lower P/E than the average (26.9) P/E for companies in the personal products industry.
Its relatively low P/E ratio indicates that Bajaj Consumer Care shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Bajaj Consumer Care increased earnings per share by 5.8% last year. And it has bolstered its earnings per share by 8.7% per year over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. 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).