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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 show how you can use Pressman Advertising Limited’s (NSE:PRESSMN) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Pressman Advertising’s P/E ratio is 7.4. That corresponds to an earnings yield of approximately 14%.
Check out our latest analysis for Pressman Advertising
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Pressman Advertising:
P/E of 7.4 = ₹25.4 ÷ ₹3.43 (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. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. 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.
Pressman Advertising’s earnings per share grew by -6.2% in the last twelve months. And its annual EPS growth rate over 3 years is 29%. Unfortunately, earnings per share are down 2.2% a year, over 5 years.
How Does Pressman Advertising’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Pressman Advertising has a lower P/E than the average (15.5) in the media industry classification.
Pressman Advertising’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Pressman Advertising, 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
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.