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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 Latteys Industries Limited’s (NSE:LATTEYS) P/E ratio and reflect on what it tells us about the company’s share price. Looking at earnings over the last twelve months, Latteys Industries has a P/E ratio of 28.78. That is equivalent to an earnings yield of about 3.5%.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Latteys Industries:
P/E of 28.78 = ₹49.5 ÷ ₹1.72 (Based on the trailing twelve months to March 2019.)
Is A High P/E 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.’
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Latteys Industries shrunk earnings per share by 45% over the last year. But EPS is up 24% over the last 5 years.
Does Latteys Industries Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Latteys Industries has a higher P/E than the average (14.2) P/E for companies in the machinery industry.
Its relatively high P/E ratio indicates that Latteys Industries shareholders think it will perform better than other companies in its industry classification.
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. 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.
Is Debt Impacting Latteys Industries’s P/E?
Net debt is 47% of Latteys Industries’s market cap. While that’s enough to warrant consideration, it doesn’t really concern us.
The Verdict On Latteys Industries’s P/E Ratio
Latteys Industries trades on a P/E ratio of 28.8, which is above the IN market average of 15.3. With modest debt but no EPS growth in the last year, it’s fair to say the P/E implies some optimism about future earnings, from the market.
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.’ We don’t have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
You might be able to find a better buy than Latteys Industries. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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 firstname.lastname@example.org. 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.