In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Hi-Tech Pipes Limited’s (NSE:HITECH) P/E ratio and reflect on what it tells us about the company’s share price. Hi-Tech Pipes has a P/E ratio of 10.57, based on the last twelve months. That means that at current prices, buyers pay ₹10.57 for every ₹1 in trailing yearly profits.
See our latest analysis for Hi-Tech Pipes
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Hi-Tech Pipes:
P/E of 10.57 = ₹236.95 ÷ ₹22.41 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings 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
Earnings growth rates have a big influence on P/E ratios. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
It’s nice to see that Hi-Tech Pipes grew EPS by a stonking 47% in the last year. And earnings per share have improved by 32% annually, over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does Hi-Tech Pipes’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (11.6) for companies in the metals and mining industry is higher than Hi-Tech Pipes’s P/E.
This suggests that market participants think Hi-Tech Pipes will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. 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.