Despite Its High P/E Ratio, Is Borosil Glass Works Limited (NSE:BOROSIL) Still Undervalued?

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Borosil Glass Works Limited's (NSE:BOROSIL) P/E ratio and reflect on what it tells us about the company's share price. Borosil Glass Works has a price to earnings ratio of 36.33, based on the last twelve months. That means that at current prices, buyers pay ₹36.33 for every ₹1 in trailing yearly profits.

See our latest analysis for Borosil Glass Works

How Do You Calculate Borosil Glass Works's P/E Ratio?

The formula for price to earnings is:

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

Or for Borosil Glass Works:

P/E of 36.33 = INR166.35 ÷ INR4.58 (Based on the trailing twelve months to September 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each INR1 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.

Does Borosil Glass Works Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Borosil Glass Works has a higher P/E than the average (22.6) P/E for companies in the consumer durables industry.

That means that the market expects Borosil Glass Works will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. 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

When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Borosil Glass Works shrunk earnings per share by 15% over the last year. But over the longer term (5 years) earnings per share have increased by 2.2%. And EPS is down 31% a year, over the last 3 years. This could justify a low P/E.

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 Borosil Glass Works's Balance Sheet Tell Us?

Net debt totals just 7.7% of Borosil Glass Works's market cap. 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 Bottom Line On Borosil Glass Works's P/E Ratio

Borosil Glass Works's P/E is 36.3 which is above average (14.0) in its market. With some debt but no EPS growth last year, the market has high expectations of future profits.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. Although we don't have analyst forecasts 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 Borosil Glass Works. 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).

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.

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. Thank you for reading.