This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how Sanginita Chemicals Limited's (NSE:SANGINITA) P/E ratio could help you assess the value on offer. Sanginita Chemicals has a P/E ratio of 33.07, based on the last twelve months. That means that at current prices, buyers pay ₹33.07 for every ₹1 in trailing yearly profits.

View our latest analysis for Sanginita Chemicals

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 Sanginita Chemicals:

P/E of 33.07 = ₹75.4 ÷ ₹2.28 (Based on the year to March 2019.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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 Does Sanginita Chemicals's P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, Sanginita Chemicals has a higher P/E than the average company (11.3) in the chemicals industry.

Its relatively high P/E ratio indicates that Sanginita Chemicals shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Sanginita Chemicals increased earnings per share by an impressive 14% over the last twelve months. And it has bolstered its earnings per share by 27% per year over the last five years. With that performance, you might expect an above average P/E ratio.

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. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.