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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 Premier Polyfilm Ltd.'s (NSE:PREMIERPOL) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Premier Polyfilm's P/E ratio is 15.06. In other words, at today's prices, investors are paying ₹15.06 for every ₹1 in prior year profit.
See our latest analysis for Premier Polyfilm
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Premier Polyfilm:
P/E of 15.06 = ₹24.55 ÷ ₹1.63 (Based on the trailing twelve months to December 2018.)
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 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
P/E ratios primarily reflect market expectations around earnings growth rates. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Premier Polyfilm shrunk earnings per share by 27% over the last year. But EPS is up 7.7% over the last 5 years.
How Does Premier Polyfilm's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (27.2) for companies in the consumer durables industry is higher than Premier Polyfilm's P/E.
Its relatively low P/E ratio indicates that Premier Polyfilm 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. You should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).