This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Shanti Overseas (India) Limited’s (NSE:SHANTI) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Shanti Overseas (India)’s P/E ratio is 4.1. That corresponds to an earnings yield of approximately 24%.
Check out our latest analysis for Shanti Overseas (India)
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Shanti Overseas (India):
P/E of 4.1 = ₹29.1 ÷ ₹7.09 (Based on the year to March 2018.)
Is A High Price-to-Earnings 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 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 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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Shanti Overseas (India) had pretty flat EPS growth in the last year.
How Does Shanti Overseas (India)’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 Shanti Overseas (India) has a lower P/E than the average (19.6) P/E for companies in the food industry.
Its relatively low P/E ratio indicates that Shanti Overseas (India) shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. 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.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.