Is Lypsa Gems & Jewellery Limited’s (NSE:LYPSAGEMS) P/E Ratio Really That Good?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Lypsa Gems & Jewellery Limited’s (NSE:LYPSAGEMS) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Lypsa Gems & Jewellery’s P/E ratio is 1.3. That means that at current prices, buyers pay ₹1.3 for every ₹1 in trailing yearly profits.

See our latest analysis for Lypsa Gems & Jewellery

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for Lypsa Gems & Jewellery:

P/E of 1.3 = ₹10.35 ÷ ₹7.95 (Based on the trailing twelve months to September 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each ₹1 of company earnings. 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.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the ‘E’ will be higher. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

Lypsa Gems & Jewellery’s earnings per share fell by 17% in the last twelve months. But EPS is up 20% over the last 5 years.

How Does Lypsa Gems & Jewellery’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Lypsa Gems & Jewellery has a lower P/E than the average (13.4) in the luxury industry classification.

NSEI:LYPSAGEMS PE PEG Gauge November 27th 18
NSEI:LYPSAGEMS PE PEG Gauge November 27th 18

Its relatively low P/E ratio indicates that Lypsa Gems & Jewellery shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Lypsa Gems & Jewellery, it’s quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.

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

The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).

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.

Is Debt Impacting Lypsa Gems & Jewellery’s P/E?

Lypsa Gems & Jewellery’s net debt is 82% of its market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Bottom Line On Lypsa Gems & Jewellery’s P/E Ratio

Lypsa Gems & Jewellery trades on a P/E ratio of 1.3, which is below the IN market average of 17. When you consider that the company has significant debt, and didn’t grow EPS last year, it isn’t surprising that the market has muted expectations.

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.’ We don’t have analyst forecasts, but you might want to assess this data-rich visualization 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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.