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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 look at Ambuja Cements Limited’s (NSE:AMBUJACEM) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Ambuja Cements’s P/E ratio is 25.28. In other words, at today’s prices, investors are paying ₹25.28 for every ₹1 in prior year profit.
See our latest analysis for Ambuja Cements
How Do You Calculate Ambuja Cements’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Ambuja Cements:
P/E of 25.28 = ₹205.15 ÷ ₹8.12 (Based on the year to September 2018.)
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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Ambuja Cements increased earnings per share by an impressive 19% over the last twelve months. And its annual EPS growth rate over 3 years is 19%. So one might expect an above average P/E ratio. But earnings per share are down 1.3% per year over the last five years.
How Does Ambuja Cements’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Ambuja Cements has a higher P/E than the average (19.7) P/E for companies in the basic materials industry.
That means that the market expects Ambuja Cements will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Remember: P/E Ratios Don’t Consider The Balance Sheet
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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).