In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Orient Paper & Industries Limited’s (NSE:ORIENTPPR) P/E ratio to inform your assessment of the investment opportunity. Orient Paper & Industries has a price to earnings ratio of 12.48, based on the last twelve months. That corresponds to an earnings yield of approximately 8.0%.
Check out our latest analysis for Orient Paper & Industries
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 Orient Paper & Industries:
P/E of 12.48 = ₹44 ÷ ₹3.53 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each ₹1 of company earnings. 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
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 unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Orient Paper & Industries’s earnings per share fell by 14% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 62%.
How Does Orient Paper & Industries’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below Orient Paper & Industries has a P/E ratio that is fairly close for the average for the forestry industry, which is 12.6.
Orient Paper & Industries’s P/E tells us that market participants think its prospects are roughly in line with its industry. The company could surprise by performing better than average, in the future. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).