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 show how you can use Sarla Performance Fibers Limited’s (NSE:SARLAPOLY) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Sarla Performance Fibers’s P/E ratio is 9.95. In other words, at today’s prices, investors are paying ₹9.95 for every ₹1 in prior year profit.
View our latest analysis for Sarla Performance Fibers
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Sarla Performance Fibers:
P/E of 9.95 = ₹28.8 ÷ ₹2.89 (Based on the year to March 2018.)
Is A High P/E 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 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. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Sarla Performance Fibers saw earnings per share decrease by 29% last year. And EPS is down 4.2% a year, over the last 3 years. This growth rate might warrant a low P/E ratio.
How Does Sarla Performance Fibers’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 (12.7) for companies in the luxury industry is higher than Sarla Performance Fibers’s P/E.
Sarla Performance Fibers’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 Sarla Performance Fibers, 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.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.