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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Nitiraj Engineers Limited's (NSE:NITIRAJ) P/E ratio to inform your assessment of the investment opportunity. What is Nitiraj Engineers's P/E ratio? Well, based on the last twelve months it is 10.49. In other words, at today's prices, investors are paying ₹10.49 for every ₹1 in prior year profit.
See our latest analysis for Nitiraj Engineers
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Nitiraj Engineers:
P/E of 10.49 = ₹77 ÷ ₹7.34 (Based on the year to March 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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 Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
In the last year, Nitiraj Engineers grew EPS like Taylor Swift grew her fan base back in 2010; the 98% gain was both fast and well deserved. On the other hand, the longer term performance is poor, with EPS down -2.5% per year over 3 years.
How Does Nitiraj Engineers's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Nitiraj Engineers has a lower P/E than the average (17.8) in the electronic industry classification.
This suggests that market participants think Nitiraj Engineers will underperform other companies in its industry. Since the market seems unimpressed with Nitiraj Engineers, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. 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.