Do You Know What Tribhovandas Bhimji Zaveri Limited's (NSE:TBZ) P/E Ratio Means?

Simply Wall St

Wed, Jun 19, 2019, 6:19 PM

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Tribhovandas Bhimji Zaveri Limited's (NSE:TBZ) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Tribhovandas Bhimji Zaveri's P/E ratio is 18.11. That is equivalent to an earnings yield of about 5.5%.

See our latest analysis for Tribhovandas Bhimji Zaveri

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Tribhovandas Bhimji Zaveri:

P/E of 18.11 = ₹42.2 ÷ ₹2.33 (Based on the trailing twelve months to March 2019.)

Is A High Price-to-Earnings 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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Tribhovandas Bhimji Zaveri saw earnings per share decrease by 27% last year. And it has shrunk its earnings per share by 22% per year over the last five years. This growth rate might warrant a below average P/E ratio.

How Does Tribhovandas Bhimji Zaveri'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. The image below shows that Tribhovandas Bhimji Zaveri has a lower P/E than the average (29.6) P/E for companies in the specialty retail industry.

NSEI:TBZ Price Estimation Relative to Market, June 20th 2019

This suggests that market participants think Tribhovandas Bhimji Zaveri will underperform other companies in its industry. 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.

Remember: P/E Ratios Don't Consider The Balance Sheet

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.