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 Kitex Garments Limited's (NSE:KITEX) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Kitex Garments has a P/E ratio of 10.53. That corresponds to an earnings yield of approximately 9.5%.
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View our latest analysis for Kitex Garments
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Kitex Garments:
P/E of 10.53 = ₹112.1 ÷ ₹10.65 (Based on the trailing twelve months to March 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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
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.
Kitex Garments increased earnings per share by an impressive 11% over the last twelve months. And earnings per share have improved by 4.3% annually, over the last five years. So one might expect an above average P/E ratio. But earnings per share are down 14% per year over the last three years.
How Does Kitex Garments'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 Kitex Garments has a lower P/E than the average (11.7) P/E for companies in the luxury industry.
Kitex Garments'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 Kitex Garments, 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.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.