In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Balaji Amines Limited’s (NSE:BALAMINES) P/E ratio could help you assess the value on offer. Based on the last twelve months, Balaji Amines’s P/E ratio is 12.57. That corresponds to an earnings yield of approximately 8.0%.
View our latest analysis for Balaji Amines
How Do You Calculate Balaji Amines’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Balaji Amines:
P/E of 12.57 = ₹439.05 ÷ ₹34.93 (Based on the year to March 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. 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. 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.
Balaji Amines increased earnings per share by a whopping 37% last year. And it has bolstered its earnings per share by 28% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.
How Does Balaji Amines’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Balaji Amines has a lower P/E than the average (17.3) P/E for companies in the chemicals industry.
This suggests that market participants think Balaji Amines will underperform other companies in its industry. Since the market seems unimpressed with Balaji Amines, it’s quite possible it could surprise on the upside. 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. 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.