This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Kridhan Infra Limited’s (NSE:KRIINFRA) P/E ratio to inform your assessment of the investment opportunity. Kridhan Infra has a P/E ratio of 10.9, based on the last twelve months. In other words, at today’s prices, investors are paying ₹10.9 for every ₹1 in prior year profit.
See our latest analysis for Kridhan Infra
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 Kridhan Infra:
P/E of 10.9 = ₹52.65 ÷ ₹4.83 (Based on the trailing twelve months to June 2018.)
Is A High Price-to-Earnings 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 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Kridhan Infra’s earnings per share fell by 64% in the last twelve months. But EPS is up 7.3% over the last 5 years.
How Does Kridhan Infra’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 (11.9) for companies in the metals and mining industry is higher than Kridhan Infra’s P/E.
Kridhan Infra’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. 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).
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.