Is Lexus Granito (India) Limited’s (NSE:LEXUS) P/E Ratio Really That Good?

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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll apply a basic P/E ratio analysis to Lexus Granito (India) Limited’s (NSE:LEXUS), to help you decide if the stock is worth further research. Based on the last twelve months, Lexus Granito (India)’s P/E ratio is 5.44. That corresponds to an earnings yield of approximately 18%.

Check out our latest analysis for Lexus Granito (India)

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Lexus Granito (India):

P/E of 5.44 = ₹22.5 ÷ ₹4.13 (Based on the year to March 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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

If earnings fall then in the future the ‘E’ will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Lexus Granito (India)’s earnings per share fell by 26% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 55%. And it has shrunk its earnings per share by 9.4% per year over the last three years. This could justify a low P/E.

Does Lexus Granito (India) 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. We can see in the image below that the average P/E (28.1) for companies in the consumer durables industry is higher than Lexus Granito (India)’s P/E.

NSEI:LEXUS Price Estimation Relative to Market, June 27th 2019
NSEI:LEXUS Price Estimation Relative to Market, June 27th 2019

Lexus Granito (India)’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Lexus Granito (India), it’s quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

How Does Lexus Granito (India)’s Debt Impact Its P/E Ratio?

Lexus Granito (India)’s net debt is considerable, at 131% of its market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you’re comparing it to other stocks.

The Bottom Line On Lexus Granito (India)’s P/E Ratio

Lexus Granito (India)’s P/E is 5.4 which is below average (15.4) in the IN market. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage.

Investors should be looking to buy stocks that the market is wrong about. 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.’ Although we don’t have analyst forecasts, you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.