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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 look at APL Apollo Tubes Limited’s (NSE:APLAPOLLO) P/E ratio and reflect on what it tells us about the company’s share price. APL Apollo Tubes has a price to earnings ratio of 17.68, based on the last twelve months. That corresponds to an earnings yield of approximately 5.7%.

Check out our latest analysis for APL Apollo Tubes

How Do I Calculate APL Apollo Tubes’s Price To Earnings Ratio?

The formula for P/E is:

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

Or for APL Apollo Tubes:

P/E of 17.68 = ₹1134.45 ÷ ₹64.17 (Based on the year to September 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

APL Apollo Tubes maintained roughly steady earnings over the last twelve months. But EPS is up 23% over the last 5 years.

How Does APL Apollo Tubes’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that APL Apollo Tubes has a higher P/E than the average (11.1) P/E for companies in the metals and mining industry.

APL Apollo Tubes’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. 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).

Is Debt Impacting APL Apollo Tubes’s P/E?

Net debt totals 38% of APL Apollo Tubes’s market cap. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Verdict On APL Apollo Tubes’s P/E Ratio

APL Apollo Tubes trades on a P/E ratio of 17.7, which is above the IN market average of 16.3. Given the debt is only modest, and earnings are already moving in the right direction, it’s not surprising that the market expects continued improvement.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold they key to an excellent investment decision.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.