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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how Kalpataru Power Transmission Limited's (NSE:KALPATPOWR) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Kalpataru Power Transmission has a P/E ratio of 17.25. That means that at current prices, buyers pay ₹17.25 for every ₹1 in trailing yearly profits.

See our latest analysis for Kalpataru Power Transmission

How Do You Calculate Kalpataru Power Transmission's P/E Ratio?

The formula for P/E is:

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

Or for Kalpataru Power Transmission:

P/E of 17.25 = ₹524.6 ÷ ₹30.42 (Based on the year 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. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.

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. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Kalpataru Power Transmission's 66% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. The cherry on top is that the five year growth rate was an impressive 31% per year. With that kind of growth rate we would generally expect a high P/E ratio.

Does Kalpataru Power Transmission Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Kalpataru Power Transmission has a higher P/E than the average (14.8) P/E for companies in the construction industry.

That means that the market expects Kalpataru Power Transmission 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.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.