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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Vertoz Advertising Limited's (NSE:VERTOZ), to help you decide if the stock is worth further research. Based on the last twelve months, Vertoz Advertising's P/E ratio is 16.49. That means that at current prices, buyers pay ₹16.49 for every ₹1 in trailing yearly profits.
View our latest analysis for Vertoz Advertising
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Vertoz Advertising:
P/E of 16.49 = ₹202.2 ÷ ₹12.26 (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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.
Vertoz Advertising shrunk earnings per share by 12% over the last year. But over the longer term (5 years) earnings per share have increased by 48%.
Does Vertoz Advertising Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below Vertoz Advertising has a P/E ratio that is fairly close for the average for the media industry, which is 15.5.
That indicates that the market expects Vertoz Advertising will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.