In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Cantabil Retail India Limited’s (NSE:CANTABIL) P/E ratio and reflect on what it tells us about the company’s share price. Cantabil Retail India has a P/E ratio of 10.05, based on the last twelve months. That means that at current prices, buyers pay ₹10.05 for every ₹1 in trailing yearly profits.
View our latest analysis for Cantabil Retail India
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Cantabil Retail India:
P/E of 10.05 = ₹129.5 ÷ ₹12.88 (Based on the trailing twelve months to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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
Earnings growth rates have a big influence on P/E ratios. 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Cantabil Retail India increased earnings per share by a whopping 315% last year. And its annual EPS growth rate over 5 years is 75%. With that performance, I would expect it to have an above average P/E ratio.
How Does Cantabil Retail India’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 (12.7) for companies in the luxury industry is higher than Cantabil Retail India’s P/E.
This suggests that market participants think Cantabil Retail India will underperform other companies in its industry. Since the market seems unimpressed with Cantabil Retail India, it’s quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. 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.