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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Mindpool Technologies Limited's (NSE:MINDPOOL) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Mindpool Technologies's P/E ratio is 3.63. That is equivalent to an earnings yield of about 28%.
View our latest analysis for Mindpool Technologies
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Mindpool Technologies:
P/E of 3.63 = ₹18.55 ÷ ₹5.11 (Based on the year to March 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
Mindpool Technologies shrunk earnings per share by 9.0% last year. And it has shrunk its earnings per share by 23% per year over the last five years. So you wouldn't expect a very high P/E.
Does Mindpool Technologies Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see Mindpool Technologies has a lower P/E than the average (14.7) in the it industry classification.
This suggests that market participants think Mindpool Technologies will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.