Don't Sell Techno Electric & Engineering Company Limited (NSE:TECHNOE) Before You Read This

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Techno Electric & Engineering Company Limited's (NSE:TECHNOE) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Techno Electric & Engineering's P/E ratio is 15.15. That corresponds to an earnings yield of approximately 6.6%.

See our latest analysis for Techno Electric & Engineering

How Do You Calculate Techno Electric & Engineering's P/E Ratio?

The formula for P/E is:

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

Or for Techno Electric & Engineering:

P/E of 15.15 = ₹260 ÷ ₹17.16 (Based on the year to March 2019.)

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 Does Techno Electric & Engineering's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Techno Electric & Engineering has a higher P/E than the average company (14) in the construction industry.

Its relatively high P/E ratio indicates that Techno Electric & Engineering shareholders think it will perform better than other companies in its industry classification.

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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Techno Electric & Engineering's earnings per share fell by 6.0% in the last twelve months. But EPS is up 17% over the last 5 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

So What Does Techno Electric & Engineering's Balance Sheet Tell Us?

With net cash of ₹5.3b, Techno Electric & Engineering has a very strong balance sheet, which may be important for its business. Having said that, at 18% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On Techno Electric & Engineering's P/E Ratio

Techno Electric & Engineering's P/E is 15.2 which is about average (14.3) in the IN market. While the lack of recent growth is probably muting optimism, the net cash position means it's not surprising that expectations put the company roughly in line with the market average P/E.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than Techno Electric & Engineering. 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 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.