The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Man Infraconstruction Limited’s (NSE:MANINFRA) P/E ratio to inform your assessment of the investment opportunity. Man Infraconstruction has a price to earnings ratio of 17.62, based on the last twelve months. That is equivalent to an earnings yield of about 5.7%.

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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 Man Infraconstruction:

P/E of 17.62 = ₹37.3 ÷ ₹2.12 (Based on the trailing twelve months to December 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 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

Earnings growth rates have a big influence on P/E ratios. 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.

Man Infraconstruction saw earnings per share decrease by 17% last year. But over the longer term (5 years) earnings per share have increased by 15%.

How Does Man Infraconstruction’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 Man Infraconstruction has a higher P/E than the average (15.6) P/E for companies in the construction industry.

That means that the market expects Man Infraconstruction will outperform other companies in its industry. 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.

Remember: P/E Ratios Don’t Consider The Balance Sheet

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).