In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Nalwa Sons Investments Limited’s (NSE:NSIL) P/E ratio and reflect on what it tells us about the company’s share price. Nalwa Sons Investments has a price to earnings ratio of 52.76, based on the last twelve months. That corresponds to an earnings yield of approximately 1.9%.
See our latest analysis for Nalwa Sons Investments
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 Nalwa Sons Investments:
P/E of 52.76 = ₹1172.2 ÷ ₹22.22 (Based on the trailing twelve months to March 2018.)
Is A High P/E 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
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Nalwa Sons Investments’s earnings per share fell by 39% in the last twelve months. And it has shrunk its earnings per share by 12% per year over the last five years. This could justify a pessimistic P/E.
How Does Nalwa Sons Investments’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Nalwa Sons Investments has a much higher P/E than the average company (17.3) in the capital markets industry.
Nalwa Sons Investments’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.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. 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.