In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how Johnson Controls-Hitachi Air Conditioning India Limited's (NSE:JCHAC) P/E ratio could help you assess the value on offer. Based on the last twelve months, Johnson Controls-Hitachi Air Conditioning India's P/E ratio is 53.43. That is equivalent to an earnings yield of about 1.9%.
View our latest analysis for Johnson Controls-Hitachi Air Conditioning India
How Do I Calculate Johnson Controls-Hitachi Air Conditioning 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 Johnson Controls-Hitachi Air Conditioning India:
P/E of 53.43 = ₹1940.55 ÷ ₹36.32 (Based on the year to June 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. 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.
Does Johnson Controls-Hitachi Air Conditioning India Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. As you can see below, Johnson Controls-Hitachi Air Conditioning India has a higher P/E than the average company (22.5) in the consumer durables industry.
That means that the market expects Johnson Controls-Hitachi Air Conditioning India will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. 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
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 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.
Most would be impressed by Johnson Controls-Hitachi Air Conditioning India earnings growth of 11% in the last year. And its annual EPS growth rate over 5 years is 22%. This could arguably justify a relatively high P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.