This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use DRS Dilip Roadlines Limited's (NSE:DRSDILIP) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, DRS Dilip Roadlines's P/E ratio is 43.54. In other words, at today's prices, investors are paying ₹43.54 for every ₹1 in prior year profit.
See our latest analysis for DRS Dilip Roadlines
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for DRS Dilip Roadlines:
P/E of 43.54 = ₹76 ÷ ₹1.75 (Based on the trailing twelve months to March 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.'
How Does DRS Dilip Roadlines's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that DRS Dilip Roadlines has a significantly higher P/E than the average (10) P/E for companies in the transportation industry.
Its relatively high P/E ratio indicates that DRS Dilip Roadlines shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
DRS Dilip Roadlines saw earnings per share decrease by 24% last year. But it has grown its earnings per share by 43% per year over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. 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.