Here’s What V-Mart Retail Limited’s (NSE:VMART) P/E Is Telling Us

Neil Montgomery

Mon, Feb 4, 2019, 5:00 PM

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use V-Mart Retail Limited’s (NSE:VMART) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, V-Mart Retail’s P/E ratio is 66.01. That means that at current prices, buyers pay ₹66.01 for every ₹1 in trailing yearly profits.

View our latest analysis for V-Mart Retail

How Do You Calculate V-Mart Retail’s P/E Ratio?

The formula for price to earnings is:

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

Or for V-Mart Retail:

P/E of 66.01 = ₹2681.15 ÷ ₹40.62 (Based on the trailing twelve months to September 2018.)

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 a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.

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. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

V-Mart Retail increased earnings per share by a whopping 38% last year. And earnings per share have improved by 23% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.

How Does V-Mart Retail’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that V-Mart Retail has a P/E ratio that is roughly in line with the multiline retail industry average (65.1).

That indicates that the market expects V-Mart Retail will perform roughly in line with other companies in its industry. So if V-Mart Retail actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).