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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 show how you can use Latteys Industries Limited's (NSE:LATTEYS) P/E ratio to inform your assessment of the investment opportunity. What is Latteys Industries's P/E ratio? Well, based on the last twelve months it is 26.34. In other words, at today's prices, investors are paying ₹26.34 for every ₹1 in prior year profit.
See our latest analysis for Latteys Industries
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Latteys Industries:
P/E of 26.34 = ₹45.3 ÷ ₹1.72 (Based on the trailing twelve months to March 2019.)
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 isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Latteys Industries saw earnings per share decrease by 45% last year. But over the longer term (5 years) earnings per share have increased by 24%.
How Does Latteys Industries's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Latteys Industries has a higher P/E than the average (14.4) P/E for companies in the machinery industry.
Its relatively high P/E ratio indicates that Latteys Industries shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).