In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Reliance Industries Limited's (NSE:RELIANCE) P/E ratio to inform your assessment of the investment opportunity. Reliance Industries has a price to earnings ratio of 17.44, based on the last twelve months. That means that at current prices, buyers pay ₹17.44 for every ₹1 in trailing yearly profits.
See our latest analysis for Reliance Industries
How Do You Calculate Reliance Industries's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Reliance Industries:
P/E of 17.44 = ₹1184.35 ÷ ₹67.9 (Based on the trailing twelve months to June 2019.)
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 Does Reliance Industries's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, Reliance Industries has a higher P/E than the average company (9.9) in the oil and gas industry.
That means that the market expects Reliance Industries will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Most would be impressed by Reliance Industries earnings growth of 10% in the last year. And earnings per share have improved by 11% annually, over the last five years. With that performance, you might expect an above average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).