Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Emkay Taps and Cutting Tools Limited's (NSE:EMKAYTOOLS), to help you decide if the stock is worth further research. Emkay Taps and Cutting Tools has a P/E ratio of 24.29, based on the last twelve months. That corresponds to an earnings yield of approximately 4.1%.
Check out our latest analysis for Emkay Taps and Cutting Tools
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Emkay Taps and Cutting Tools:
P/E of 24.29 = ₹120 ÷ ₹4.94 (Based on the year to March 2019.)
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
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Emkay Taps and Cutting Tools saw earnings per share decrease by 73% last year. And it has shrunk its earnings per share by 28% per year over the last three years. This might lead to low expectations.
How Does Emkay Taps and Cutting Tools's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (14.4) for companies in the machinery industry is lower than Emkay Taps and Cutting Tools's P/E.
Its relatively high P/E ratio indicates that Emkay Taps and Cutting Tools shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.