The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at INOX Leisure Limited’s (NSE:INOXLEISUR) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, INOX Leisure’s P/E ratio is 17.91. In other words, at today’s prices, investors are paying ₹17.91 for every ₹1 in prior year profit.

View our latest analysis for INOX Leisure

How Do You Calculate INOX Leisure’s P/E Ratio?

The formula for price to earnings is:

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

Or for INOX Leisure:

P/E of 17.91 = ₹277.55 ÷ ₹15.5 (Based on the year 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 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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.

INOX Leisure increased earnings per share by a whopping 149% last year. And earnings per share have improved by 28% annually, over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.

How Does INOX Leisure’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. As you can see below INOX Leisure has a P/E ratio that is fairly close for the average for the entertainment industry, which is 18.9.

Its P/E ratio suggests that INOX Leisure shareholders think that in the future it will perform about the same as other companies in its industry classification. So if INOX Leisure actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.

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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.

INOX Leisure’s Balance Sheet

INOX Leisure has net debt worth just 8.7% of its market capitalization. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.

The Verdict On INOX Leisure’s P/E Ratio

INOX Leisure trades on a P/E ratio of 17.9, which is above the IN market average of 15.5. The company is not overly constrained by its modest debt levels, and it is growing earnings per share. Therefore it seems reasonable that the market would have relatively high expectations of the company

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: INOX Leisure 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.