The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Maheshwari Logistics Limited’s (NSE:MAHESHWARI) P/E ratio and reflect on what it tells us about the company’s share price. Maheshwari Logistics has a P/E ratio of 20.47, based on the last twelve months. That corresponds to an earnings yield of approximately 4.9%.

Check out our latest analysis for Maheshwari Logistics

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Maheshwari Logistics:

P/E of 20.47 = ₹191 ÷ ₹9.33 (Based on the year to September 2018.)

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 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. 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.

Maheshwari Logistics increased earnings per share by a whopping 36% last year. And it has bolstered its earnings per share by 11% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.

How Does Maheshwari Logistics’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (19) for companies in the trade distributors industry is lower than Maheshwari Logistics’s P/E.

Its relatively high P/E ratio indicates that Maheshwari Logistics shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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

Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.