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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Poly Medicure Limited's (NSE:POLYMED), to help you decide if the stock is worth further research. Poly Medicure has a P/E ratio of 25.94, based on the last twelve months. In other words, at today's prices, investors are paying ₹25.94 for every ₹1 in prior year profit.
View our latest analysis for Poly Medicure
How Do I Calculate Poly Medicure's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Poly Medicure:
P/E of 25.94 = ₹192.2 ÷ ₹7.41 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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
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 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.
Poly Medicure's earnings per share fell by 7.4% in the last twelve months. But it has grown its earnings per share by 7.7% per year over the last five years.
How Does Poly Medicure'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 Poly Medicure has a significantly higher P/E than the average (8.5) P/E for companies in the medical equipment industry.
Its relatively high P/E ratio indicates that Poly Medicure shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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 investing in growth. That means taking on debt (or spending its cash).