In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at InterGlobe Aviation Limited’s (NSE:INDIGO) P/E ratio and reflect on what it tells us about the company’s share price. InterGlobe Aviation has a P/E ratio of 17.44, based on the last twelve months. That is equivalent to an earnings yield of about 5.7%.
Check out our latest analysis for InterGlobe Aviation
How Do I Calculate InterGlobe Aviation’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for InterGlobe Aviation:
P/E of 17.44 = ₹1046.95 ÷ ₹60.03 (Based on the year to March 2018.)
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. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. 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.
It’s nice to see that InterGlobe Aviation grew EPS by a stonking 31% in the last year. And earnings per share have improved by 17% annually, over the last five years. So we’d generally expect it to have a relatively high P/E ratio.
How Does InterGlobe Aviation’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (9.7) for companies in the airlines industry is lower than InterGlobe Aviation’s P/E.
Its relatively high P/E ratio indicates that InterGlobe Aviation shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.
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. 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).