The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Minda Industries Limited's (NSE:MINDAIND) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Minda Industries has a P/E ratio of 30.9. In other words, at today's prices, investors are paying ₹30.9 for every ₹1 in prior year profit.
See our latest analysis for Minda Industries
How Do You Calculate Minda Industries's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Minda Industries:
P/E of 30.9 = ₹317.15 ÷ ₹10.26 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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.
Does Minda Industries Have A Relatively High Or Low P/E For Its Industry?
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, Minda Industries has a higher P/E than the average company (13) in the auto components industry.
Minda Industries's P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Minda Industries saw earnings per share decrease by 20% last year. But EPS is up 103% over the last 5 years.
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. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).