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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Sarla Performance Fibers Limited's (NSE:SARLAPOLY), to help you decide if the stock is worth further research. Based on the last twelve months, Sarla Performance Fibers's P/E ratio is 8.46. That means that at current prices, buyers pay ₹8.46 for every ₹1 in trailing yearly profits.

Check out our latest analysis for Sarla Performance Fibers

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Sarla Performance Fibers:

P/E of 8.46 = ₹25.9 ÷ ₹3.06 (Based on the year to March 2019.)

Is A High P/E 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 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

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Sarla Performance Fibers saw earnings per share improve by -5.7% last year. In contrast, EPS has decreased by 5.2%, annually, over 5 years.

Does Sarla Performance Fibers Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (10.7) for companies in the luxury industry is higher than Sarla Performance Fibers's P/E.

This suggests that market participants think Sarla Performance Fibers will underperform other companies in its industry. Since the market seems unimpressed with Sarla Performance Fibers, 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

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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).