The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at INOX Leisure Limited’s (NSE:INOXLEISUR) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, INOX Leisure’s P/E ratio is 17.91. In other words, at today’s prices, investors are paying ₹17.91 for every ₹1 in prior year profit.

View our latest analysis for INOX Leisure

How Do You Calculate INOX Leisure’s P/E Ratio?

The formula for price to earnings is:

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

Or for INOX Leisure:

P/E of 17.91 = ₹277.55 ÷ ₹15.5 (Based on the year to December 2018.)

Is A High Price-to-Earnings 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. 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 Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. Then, a lower P/E should attract more buyers, pushing the share price up.

INOX Leisure increased earnings per share by a whopping 149% last year. And earnings per share have improved by 28% annually, over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.

How Does INOX Leisure’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. As you can see below INOX Leisure has a P/E ratio that is fairly close for the average for the entertainment industry, which is 18.9.

Its P/E ratio suggests that INOX Leisure shareholders think that in the future it will perform about the same as other companies in its industry classification. So if INOX Leisure actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.

Remember: P/E Ratios Don’t Consider The Balance Sheet

Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.