This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Tata Global Beverages Limited's (NSE:TATAGLOBAL) P/E ratio could help you assess the value on offer. Tata Global Beverages has a price to earnings ratio of 39.2, based on the last twelve months. That means that at current prices, buyers pay ₹39.2 for every ₹1 in trailing yearly profits.
Check out our latest analysis for Tata Global Beverages
How Do I Calculate Tata Global Beverages's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Tata Global Beverages:
P/E of 39.2 = ₹259.35 ÷ ₹6.62 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each ₹1 of company 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.
Does Tata Global Beverages Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Tata Global Beverages has a higher P/E than the average (14) P/E for companies in the food industry.
That means that the market expects Tata Global Beverages will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Tata Global Beverages's earnings per share fell by 14% in the last twelve months. But over the longer term (3 years), earnings per share have increased by 198%. And it has shrunk its earnings per share by 2.6% per year over the last five years. This could justify a pessimistic P/E.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.