The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Srikalahasthi Pipes Limited’s (NSE:SRIPIPES) P/E ratio and reflect on what it tells us about the company’s share price. Srikalahasthi Pipes has a price to earnings ratio of 6.8, based on the last twelve months. In other words, at today’s prices, investors are paying ₹6.8 for every ₹1 in prior year profit.
View our latest analysis for Srikalahasthi Pipes
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 Srikalahasthi Pipes:
P/E of 6.8 = ₹188.2 ÷ ₹27.66 (Based on the year 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 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
If earnings fall then in the future the ‘E’ will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
Srikalahasthi Pipes shrunk earnings per share by 24% over the last year. But over the longer term (5 years) earnings per share have increased by 21%. And EPS is down 5.9% a year, over the last 3 years. This could justify a low P/E.
How Does Srikalahasthi Pipes’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (12) for companies in the metals and mining industry is higher than Srikalahasthi Pipes’s P/E.
Its relatively low P/E ratio indicates that Srikalahasthi Pipes shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Srikalahasthi Pipes, it’s quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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.