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 Madhya Bharat Agro Products Limited’s (NSE:MBAPL) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Madhya Bharat Agro Products’s P/E ratio is 20.99. That means that at current prices, buyers pay ₹20.99 for every ₹1 in trailing yearly profits.
Check out our latest analysis for Madhya Bharat Agro Products
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Madhya Bharat Agro Products:
P/E of 20.99 = ₹49 ÷ ₹2.33 (Based on the trailing twelve months to March 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Madhya Bharat Agro Products saw earnings per share decrease by 56% last year. But it has grown its earnings per share by 7.0% per year over the last five years.
How Does Madhya Bharat Agro Products’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 (16.1) for companies in the chemicals industry is lower than Madhya Bharat Agro Products’s P/E.
Madhya Bharat Agro Products’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. 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
The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. 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).