In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Dollar Industries Limited's (NSE:DOLLAR) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Dollar Industries has a P/E ratio of 15.82. That is equivalent to an earnings yield of about 6.3%.
See our latest analysis for Dollar Industries
How Do You Calculate Dollar Industries's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Dollar Industries:
P/E of 15.82 = ₹205.40 ÷ ₹12.98 (Based on the trailing twelve months to March 2019.)
Is A High P/E 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 Does Dollar Industries's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Dollar Industries has a higher P/E than the average (10.5) P/E for companies in the luxury industry.
That means that the market expects Dollar Industries will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
It's great to see that Dollar Industries grew EPS by 13% in the last year. And its annual EPS growth rate over 5 years is 30%. With that performance, you might expect an above average P/E ratio.
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Is Debt Impacting Dollar Industries's P/E?
Dollar Industries has net debt worth 17% of its market capitalization. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.