Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Jindal Stainless Limited's (NSE:JSL) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Jindal Stainless has a P/E ratio of 12.29. That means that at current prices, buyers pay ₹12.29 for every ₹1 in trailing yearly profits.

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See our latest analysis for Jindal Stainless

How Do I Calculate Jindal Stainless's Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Jindal Stainless:

P/E of 12.29 = ₹36.5 ÷ ₹2.97 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Jindal Stainless's earnings per share fell by 61% in the last twelve months.

How Does Jindal Stainless's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that Jindal Stainless has a higher P/E than the average (10) P/E for companies in the metals and mining industry.

Its relatively high P/E ratio indicates that Jindal Stainless 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 always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.