In This Article:
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 Ginni Filaments Limited’s (NSE:GINNIFILA) P/E ratio could help you assess the value on offer. Based on the last twelve months, Ginni Filaments’s P/E ratio is 15.36. That means that at current prices, buyers pay ₹15.36 for every ₹1 in trailing yearly profits.
View our latest analysis for Ginni Filaments
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Ginni Filaments:
P/E of 15.36 = ₹17.15 ÷ ₹1.12 (Based on the trailing twelve months to September 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. When earnings grow, the ‘E’ increases, over time. 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, Ginni Filaments grew EPS by a whopping 27% in the last year. And it has improved its earnings per share by 7.1% per year over the last three years. With that performance, I would expect it to have an above average P/E ratio. Unfortunately, earnings per share are down 39% a year, over 5 years.
How Does Ginni Filaments’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 (13.8) for companies in the luxury industry is lower than Ginni Filaments’s P/E.
Its relatively high P/E ratio indicates that Ginni Filaments shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.