Do You Know What Seshasayee Paper and Boards Limited's (NSE:SESHAPAPER) P/E Ratio Means?

Simply Wall St

Fri, Jun 21, 2019, 8:53 PM

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Seshasayee Paper and Boards Limited's (NSE:SESHAPAPER) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Seshasayee Paper and Boards's P/E ratio is 6.09. That corresponds to an earnings yield of approximately 16%.

View our latest analysis for Seshasayee Paper and Boards

How Do You Calculate Seshasayee Paper and Boards's P/E Ratio?

The formula for price to earnings is:

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

Or for Seshasayee Paper and Boards:

P/E of 6.09 = ₹927.3 ÷ ₹152.26 (Based on the year to March 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each ₹1 of company earnings. 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

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

In the last year, Seshasayee Paper and Boards grew EPS like Taylor Swift grew her fan base back in 2010; the 56% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 63% is also impressive. So I'd be surprised if the P/E ratio was not above average.

Does Seshasayee Paper and Boards Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (9) for companies in the forestry industry is higher than Seshasayee Paper and Boards's P/E.

NSEI:SESHAPAPER Price Estimation Relative to Market, June 22nd 2019

Its relatively low P/E ratio indicates that Seshasayee Paper and Boards shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. 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.

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.

Is Debt Impacting Seshasayee Paper and Boards's P/E?

Seshasayee Paper and Boards has net cash of ₹2.0b. This is fairly high at 17% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Verdict On Seshasayee Paper and Boards's P/E Ratio

Seshasayee Paper and Boards's P/E is 6.1 which is below average (15.5) in the IN market. Not only should the net cash position reduce risk, but the recent growth has been impressive. The below average P/E ratio suggests that market participants don't believe the strong growth will continue. Since analysts are predicting growth will continue, one might expect to see a higher P/E so it may be worth looking closer.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than Seshasayee Paper and Boards. So you may wish to see this free collection of other companies that have grown earnings strongly.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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