Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Transport Corporation of India Limited's (NSE:TCI) P/E ratio could help you assess the value on offer. What is Transport of India's P/E ratio? Well, based on the last twelve months it is 13.42. That is equivalent to an earnings yield of about 7.5%.

Check out our latest analysis for Transport of India

How Do I Calculate Transport of India's Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Transport of India:

P/E of 13.42 = ₹260.95 ÷ ₹19.45 (Based on the trailing twelve months to June 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. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'

Does Transport of India Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (19.3) for companies in the logistics industry is higher than Transport of India's P/E.

Its relatively low P/E ratio indicates that Transport of India shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. 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.

Transport of India increased earnings per share by an impressive 16% over the last twelve months. And its annual EPS growth rate over 5 years is 15%. This could arguably justify a relatively high P/E ratio.

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

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. 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.