This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Pil Italica Lifestyle Limited’s (NSE:PILITA) P/E ratio could help you assess the value on offer. Based on the last twelve months, Pil Italica Lifestyle’s P/E ratio is 18.12. That is equivalent to an earnings yield of about 5.5%.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Pil Italica Lifestyle:
P/E of 18.12 = ₹8.07 ÷ ₹0.45 (Based on the year to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Pil Italica Lifestyle increased earnings per share by an impressive 12% over the last twelve months. And earnings per share have improved by 72% annually, over the last three years. So one might expect an above average P/E ratio. In contrast, EPS has decreased by 19%, annually, over 5 years.
How Does Pil Italica Lifestyle’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Pil Italica Lifestyle has a lower P/E than the average (24.2) P/E for companies in the consumer durables industry.
Its relatively low P/E ratio indicates that Pil Italica Lifestyle shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Pil Italica Lifestyle, it’s quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
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. 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 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.
Pil Italica Lifestyle’s Balance Sheet
Pil Italica Lifestyle has net debt worth just 0.05% of its market capitalization. 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 Pil Italica Lifestyle’s P/E Ratio
Pil Italica Lifestyle’s P/E is 18.1 which is about average (17.1) in the IN market. Given it has reasonable debt levels, and grew earnings strongly last year, the P/E indicates the market has doubts this growth can be sustained.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don’t have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
You might be able to find a better buy than Pil Italica Lifestyle. 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).
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 firstname.lastname@example.org.