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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 KEI Industries Limited's (NSE:KEI), to help you decide if the stock is worth further research. KEI Industries has a price to earnings ratio of 20.87, based on the last twelve months. That means that at current prices, buyers pay ₹20.87 for every ₹1 in trailing yearly profits.

See our latest analysis for KEI Industries

How Do I Calculate KEI Industries's Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for KEI Industries:

P/E of 20.87 = ₹479.6 ÷ ₹22.98 (Based on the trailing twelve months to March 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 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

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. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

KEI Industries increased earnings per share by an impressive 24% over the last twelve months. And it has bolstered its earnings per share by 71% per year over the last five years. This could arguably justify a relatively high P/E ratio.

How Does KEI Industries's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (12.4) for companies in the electrical industry is lower than KEI Industries's P/E.

That means that the market expects KEI Industries will outperform other companies in its industry. 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.

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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.