This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Orient Refractories Limited’s (NSE:ORIENTREF) P/E ratio and reflect on what it tells us about the company’s share price. Orient Refractories has a price to earnings ratio of 29.97, based on the last twelve months. That corresponds to an earnings yield of approximately 3.3%.
Check out our latest analysis for Orient Refractories
How Do I Calculate Orient Refractories’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Orient Refractories:
P/E of 29.97 = ₹234.75 ÷ ₹7.83 (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 isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Notably, Orient Refractories grew EPS by a whopping 34% in the last year. And earnings per share have improved by 13% annually, over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does Orient Refractories’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Orient Refractories has a higher P/E than the average (19.2) P/E for companies in the basic materials industry.
That means that the market expects Orient Refractories will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.