This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at UFO Moviez India Limited’s (NSE:UFO) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, UFO Moviez India’s P/E ratio is 12.52. That is equivalent to an earnings yield of about 8.0%.

View our latest analysis for UFO Moviez India

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for UFO Moviez India:

P/E of 12.52 = ₹259.75 ÷ ₹20.75 (Based on the year to December 2018.)

Is A High P/E 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.

How Growth Rates Impact P/E Ratios

When earnings fall, the ‘E’ decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.

UFO Moviez India’s earnings per share fell by 2.8% in the last twelve months. But EPS is up 1.9% over the last 5 years. And it has shrunk its earnings per share by 4.6% per year over the last three years. This growth rate might warrant a low P/E ratio. So it would be surprising to see a high P/E.

How Does UFO Moviez India’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (19.9) for companies in the entertainment industry is higher than UFO Moviez India’s P/E.

This suggests that market participants think UFO Moviez India will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).