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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Ahluwalia Contracts (India) Limited’s (NSE:AHLUCONT) P/E ratio could help you assess the value on offer. Ahluwalia Contracts (India) has a price to earnings ratio of 18.11, based on the last twelve months. In other words, at today’s prices, investors are paying ₹18.11 for every ₹1 in prior year profit.
Check out our latest analysis for Ahluwalia Contracts (India)
How Do I Calculate Ahluwalia Contracts (India)’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Ahluwalia Contracts (India):
P/E of 18.11 = ₹312 ÷ ₹17.23 (Based on the trailing twelve months 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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Notably, Ahluwalia Contracts (India) grew EPS by a whopping 34% in the last year. And its annual EPS growth rate over 5 years is 44%. With that performance, I would expect it to have an above average P/E ratio.
How Does Ahluwalia Contracts (India)’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Ahluwalia Contracts (India) has a higher P/E than the average (14.5) P/E for companies in the construction industry.
Its relatively high P/E ratio indicates that Ahluwalia Contracts (India) shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).