In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Jamna Auto Industries Limited’s (NSE:JAMNAAUTO) P/E ratio to inform your assessment of the investment opportunity. Jamna Auto Industries has a price to earnings ratio of 16.77, based on the last twelve months. That is equivalent to an earnings yield of about 6.0%.
See our latest analysis for Jamna Auto Industries
How Do I Calculate Jamna Auto Industries’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Jamna Auto Industries:
P/E of 16.77 = ₹64.8 ÷ ₹3.86 (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 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
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the ‘E’ will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Notably, Jamna Auto Industries grew EPS by a whopping 48% in the last year. And it has bolstered its earnings per share by 43% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.
How Does Jamna Auto Industries’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (18.1) for companies in the auto components industry is roughly the same as Jamna Auto Industries’s P/E.
Jamna Auto Industries’s P/E tells us that market participants think its prospects are roughly in line with its industry. The company could surprise by performing better than average, in the future. I inform my view byby checking management tenure and remuneration, among other things.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. 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.