Should We Worry About Alkyl Amines Chemicals Limited's (NSE:ALKYLAMINE) P/E Ratio?

Simply Wall St

Wed, Jun 26, 2019, 6:59 PM

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Alkyl Amines Chemicals Limited's (NSE:ALKYLAMINE) P/E ratio and reflect on what it tells us about the company's share price. Alkyl Amines Chemicals has a P/E ratio of 19.9, based on the last twelve months. In other words, at today's prices, investors are paying ₹19.9 for every ₹1 in prior year profit.

Check out our latest analysis for Alkyl Amines Chemicals

How Do You Calculate Alkyl Amines Chemicals's P/E Ratio?

The formula for price to earnings is:

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

Or for Alkyl Amines Chemicals:

P/E of 19.9 = ₹801.35 ÷ ₹40.26 (Based on the year to March 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each ₹1 of company 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.'

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Alkyl Amines Chemicals increased earnings per share by an impressive 24% over the last twelve months. And earnings per share have improved by 14% annually, over the last five years. With that performance, you might expect an above average P/E ratio.

Does Alkyl Amines Chemicals Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. The image below shows that Alkyl Amines Chemicals has a higher P/E than the average (13.3) P/E for companies in the chemicals industry.

NSEI:ALKYLAMINE Price Estimation Relative to Market, June 27th 2019

That means that the market expects Alkyl Amines Chemicals will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.