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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 apply a basic P/E ratio analysis to Akzo Nobel India Limited's (NSE:AKZOINDIA), to help you decide if the stock is worth further research. Akzo Nobel India has a price to earnings ratio of 36.31, based on the last twelve months. That corresponds to an earnings yield of approximately 2.8%.

View our latest analysis for Akzo Nobel India

How Do You Calculate Akzo Nobel India's P/E Ratio?

The formula for price to earnings is:

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

Or for Akzo Nobel India:

P/E of 36.31 = ₹1668.6 ÷ ₹45.96 (Based on the year to March 2019.)

Is A High Price-to-Earnings 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. 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

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.

Akzo Nobel India increased earnings per share by 4.5% last year. And its annual EPS growth rate over 5 years is 7.4%.

How Does Akzo Nobel India'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. You can see in the image below that the average P/E (15.2) for companies in the chemicals industry is lower than Akzo Nobel India's P/E.

That means that the market expects Akzo Nobel 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.

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

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.