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 Seya Industries Limited's (NSE:SEYAIND) P/E ratio could help you assess the value on offer. Seya Industries has a price to earnings ratio of 11.12, based on the last twelve months. That means that at current prices, buyers pay ₹11.12 for every ₹1 in trailing yearly profits.
Check out our latest analysis for Seya Industries
How Do I Calculate Seya Industries's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Seya Industries:
P/E of 11.12 = ₹422.65 ÷ ₹38.01 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Does Seya Industries's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Seya Industries has a P/E ratio that is roughly in line with the chemicals industry average (11.6).
Its P/E ratio suggests that Seya Industries shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
In the last year, Seya Industries grew EPS like Taylor Swift grew her fan base back in 2010; the 57% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 50% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio.
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. 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.