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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 Nandani Creation Limited's (NSE:NANDANI) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Nandani Creation's P/E ratio is 8.87. That means that at current prices, buyers pay ₹8.87 for every ₹1 in trailing yearly profits.
View our latest analysis for Nandani Creation
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Nandani Creation:
P/E of 8.87 = ₹13.3 ÷ ₹1.5 (Based on the trailing twelve months to March 2019.)
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
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.
Nandani Creation increased earnings per share by an impressive 16% over the last twelve months. And earnings per share have improved by 74% annually, over the last five years. With that performance, you might expect an above average P/E ratio. But earnings per share are down 24% per year over the last three years.
Does Nandani Creation Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Nandani Creation has a lower P/E than the average (11.6) in the luxury industry classification.
Its relatively low P/E ratio indicates that Nandani Creation shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You 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
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.