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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Vikas EcoTech Limited’s (NSE:VIKASECO) P/E ratio and reflect on what it tells us about the company’s share price. Vikas EcoTech has a P/E ratio of 14.59, based on the last twelve months. In other words, at today’s prices, investors are paying ₹14.59 for every ₹1 in prior year profit.
See our latest analysis for Vikas EcoTech
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Vikas EcoTech:
P/E of 14.59 = ₹11.2 ÷ ₹0.77 (Based on the trailing twelve months to September 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 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. Earnings growth means that in the future the ‘E’ will be higher. 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.
Vikas EcoTech’s earnings per share fell by 25% in the last twelve months. But it has grown its earnings per share by 36% per year over the last five years.
How Does Vikas EcoTech’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below Vikas EcoTech has a P/E ratio that is fairly close for the average for the chemicals industry, which is 15.6.
Vikas EcoTech’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. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.