Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Dangee Dums Limited's (NSE:DANGEE) P/E ratio to inform your assessment of the investment opportunity. Dangee Dums has a price to earnings ratio of 60.34, based on the last twelve months. That corresponds to an earnings yield of approximately 1.7%.
See our latest analysis for Dangee Dums
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Dangee Dums:
P/E of 60.34 = ₹142.00 ÷ ₹2.35 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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 Does Dangee Dums's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (14.8) for companies in the food industry is a lot lower than Dangee Dums's P/E.
Dangee Dums'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 investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
It's great to see that Dangee Dums grew EPS by 10% in the last year. Unfortunately, earnings per share are down 33% a year, over 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
So What Does Dangee Dums's Balance Sheet Tell Us?
Dangee Dums has net debt worth just 9.6% of its market capitalization. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.