In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Plastiblends India Limited’s (NSE:PLASTIBLEN) P/E ratio could help you assess the value on offer. Based on the last twelve months, Plastiblends India’s P/E ratio is 15.61. In other words, at today’s prices, investors are paying ₹15.61 for every ₹1 in prior year profit.
See our latest analysis for Plastiblends India
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Plastiblends India:
P/E of 15.61 = ₹215.1 ÷ ₹13.78 (Based on the year to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
It’s great to see that Plastiblends India grew EPS by 19% in the last year. And earnings per share have improved by 5.5% annually, over the last five years. This could arguably justify a relatively high P/E ratio. Unfortunately, earnings per share are down 4.6% a year, over 3 years.
How Does Plastiblends India’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Plastiblends India has a lower P/E than the average (17.6) in the chemicals industry classification.
Plastiblends India’s P/E tells us that market participants think it will not fare as well as its peers in the same 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.
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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).