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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Time Technoplast Limited's (NSE:TIMETECHNO) P/E ratio and reflect on what it tells us about the company's share price. Time Technoplast has a price to earnings ratio of 10.56, based on the last twelve months. That corresponds to an earnings yield of approximately 9.5%.

View our latest analysis for Time Technoplast

How Do You Calculate Time Technoplast's P/E Ratio?

The formula for P/E is:

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

Or for Time Technoplast:

P/E of 10.56 = ₹94.6 ÷ ₹8.96 (Based on the year to March 2019.)

Is A High P/E 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

P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Time Technoplast increased earnings per share by an impressive 12% over the last twelve months. And its annual EPS growth rate over 5 years is 15%. This could arguably justify a relatively high P/E ratio.

Does Time Technoplast Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (9.3) for companies in the packaging industry is lower than Time Technoplast's P/E.

That means that the market expects Time Technoplast 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. So it won't reflect the advantage of cash, or disadvantage of debt. 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.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

Time Technoplast's Balance Sheet

Time Technoplast has net debt equal to 36% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On Time Technoplast's P/E Ratio

Time Technoplast's P/E is 10.6 which is below average (15.3) in the IN market. The EPS growth last year was strong, and debt levels are quite reasonable. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. Since analysts are predicting growth will continue, one might expect to see a higher P/E so it may be worth looking closer.

Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Time Technoplast may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.