In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Finolex Cables Limited's (NSE:FINCABLES) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Finolex Cables's P/E ratio is 15.01. That means that at current prices, buyers pay ₹15.01 for every ₹1 in trailing yearly profits.
See our latest analysis for Finolex Cables
How Do I Calculate Finolex Cables's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Finolex Cables:
P/E of 15.01 = ₹379.80 ÷ ₹25.31 (Based on the year to June 2019.)
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.
Does Finolex Cables Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Finolex Cables has a higher P/E than the average (13.1) P/E for companies in the electrical industry.
Finolex Cables's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Most would be impressed by Finolex Cables earnings growth of 11% in the last year. And it has bolstered its earnings per share by 13% per year over the last five years. With that performance, you might expect an above average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.