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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Sutlej Textiles and Industries Limited's (NSE:SUTLEJTEX), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Sutlej Textiles and Industries has a P/E ratio of 7.66. That means that at current prices, buyers pay ₹7.66 for every ₹1 in trailing yearly profits.
Check out our latest analysis for Sutlej Textiles and Industries
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 Sutlej Textiles and Industries:
P/E of 7.66 = ₹27 ÷ ₹3.53 (Based on the trailing twelve months to June 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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.
Does Sutlej Textiles and Industries Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Sutlej Textiles and Industries has a lower P/E than the average (10.4) in the luxury industry classification.
This suggests that market participants think Sutlej Textiles and Industries will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. 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.
Sutlej Textiles and Industries's earnings per share fell by 41% in the last twelve months. And it has shrunk its earnings per share by 16% per year over the last five years. This might lead to muted expectations.
Remember: P/E Ratios Don't Consider The Balance Sheet
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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.