This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Suumaya Lifestyle Limited's (NSE:SUULD) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Suumaya Lifestyle has a P/E ratio of 11.66. That means that at current prices, buyers pay ₹11.66 for every ₹1 in trailing yearly profits.
View our latest analysis for Suumaya Lifestyle
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Suumaya Lifestyle:
P/E of 11.66 = ₹18.00 ÷ ₹1.54 (Based on the trailing twelve months 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. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Does Suumaya Lifestyle Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. As you can see below, Suumaya Lifestyle has a higher P/E than the average company (10.5) in the luxury industry.
Suumaya Lifestyle'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 always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Suumaya Lifestyle's earnings made like a rocket, taking off 135% last year. The cherry on top is that the five year growth rate was an impressive 49% per year. With that kind of growth rate we would generally expect a high P/E ratio.
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. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.