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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Shree Pushkar Chemicals & Fertilisers Limited's (NSE:SHREEPUSHK) P/E ratio and reflect on what it tells us about the company's share price. Shree Pushkar Chemicals & Fertilisers has a P/E ratio of 11.19, based on the last twelve months. That corresponds to an earnings yield of approximately 8.9%.
Check out our latest analysis for Shree Pushkar Chemicals & Fertilisers
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Shree Pushkar Chemicals & Fertilisers:
P/E of 11.19 = ₹156.05 ÷ ₹13.94 (Based on the year to December 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 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
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. 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.
Shree Pushkar Chemicals & Fertilisers increased earnings per share by an impressive 19% over the last twelve months. And earnings per share have improved by 15% annually, over the last five years. So one might expect an above average P/E ratio.
How Does Shree Pushkar Chemicals & Fertilisers's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (15.6) for companies in the chemicals industry is higher than Shree Pushkar Chemicals & Fertilisers's P/E.
Its relatively low P/E ratio indicates that Shree Pushkar Chemicals & Fertilisers 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.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.