Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Satia Industries Limited's (NSE:SATIA) P/E ratio could help you assess the value on offer. Satia Industries has a price to earnings ratio of 7.54, based on the last twelve months. That means that at current prices, buyers pay ₹7.54 for every ₹1 in trailing yearly profits.
Check out our latest analysis for Satia Industries
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 Satia Industries:
P/E of 7.54 = ₹720.00 ÷ ₹95.48 (Based on the trailing twelve months to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Does Satia 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. We can see in the image below that the average P/E (9.5) for companies in the forestry industry is higher than Satia Industries's P/E.
Its relatively low P/E ratio indicates that Satia Industries shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Satia Industries, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Satia Industries increased earnings per share by an impressive 24% over the last twelve months. And earnings per share have improved by 56% annually, over the last five years. With that performance, you might expect an above average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.