The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Moksh Ornaments Limited’s (NSE:MOKSH) P/E ratio could help you assess the value on offer. Based on the last twelve months, Moksh Ornaments’s P/E ratio is 4.36. That is equivalent to an earnings yield of about 23%.
View our latest analysis for Moksh Ornaments
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 Moksh Ornaments:
P/E of 4.36 = ₹23 ÷ ₹5.28 (Based on the trailing twelve months to March 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 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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. 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.
Moksh Ornaments’s earnings per share fell by 12% in the last twelve months. But EPS is up 30% over the last 5 years.
How Does Moksh Ornaments’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Moksh Ornaments has a lower P/E than the average (13.1) P/E for companies in the luxury industry.
This suggests that market participants think Moksh Ornaments will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Moksh Ornaments’s Balance Sheet
Moksh Ornaments has net debt worth a very significant 119% of its market capitalization. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you’re comparing it to other stocks.