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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Somi Conveyor Beltings Limited's (NSE:SOMICONV), to help you decide if the stock is worth further research. What is Somi Conveyor Beltings's P/E ratio? Well, based on the last twelve months it is 15.95. That corresponds to an earnings yield of approximately 6.3%.
See our latest analysis for Somi Conveyor Beltings
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Somi Conveyor Beltings:
P/E of 15.95 = ₹20.9 ÷ ₹1.31 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about 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. Then, a higher P/E might scare off shareholders, pushing the share price down.
In the last year, Somi Conveyor Beltings grew EPS like Taylor Swift grew her fan base back in 2010; the 53% gain was both fast and well deserved. Unfortunately, earnings per share are down 16% a year, over 5 years.
How Does Somi Conveyor Beltings's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below Somi Conveyor Beltings has a P/E ratio that is fairly close for the average for the machinery industry, which is 16.7.
That indicates that the market expects Somi Conveyor Beltings will perform roughly in line with other companies in its industry. So if Somi Conveyor Beltings actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.