This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Venky’s (India) Limited’s (NSE:VENKYS) P/E ratio and reflect on what it tells us about the company’s share price. Venky’s (India) has a price to earnings ratio of 16.64, based on the last twelve months. That means that at current prices, buyers pay ₹16.64 for every ₹1 in trailing yearly profits.
Check out our latest analysis for Venky’s (India)
How Do I Calculate Venky’s (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 Venky’s (India):
P/E of 16.64 = ₹2329.05 ÷ ₹139.96 (Based on the trailing twelve months to September 2018.)
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. 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.’
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Most would be impressed by Venky’s (India) earnings growth of 21% in the last year. And its annual EPS growth rate over 5 years is 50%. This could arguably justify a relatively high P/E ratio.
How Does Venky’s (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. If you look at the image below, you can see Venky’s (India) has a lower P/E than the average (18.2) in the food industry classification.
This suggests that market participants think Venky’s (India) will underperform other companies in its industry. Since the market seems unimpressed with Venky’s (India), it’s quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).