Despite Its High P/E Ratio, Is Bannari Amman Sugars Limited (NSE:BANARISUG) Still Undervalued?

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how Bannari Amman Sugars Limited's (NSE:BANARISUG) P/E ratio could help you assess the value on offer. Bannari Amman Sugars has a P/E ratio of 20.7, based on the last twelve months. In other words, at today's prices, investors are paying ₹20.7 for every ₹1 in prior year profit.

Check out our latest analysis for Bannari Amman Sugars

How Do I Calculate Bannari Amman Sugars's Price To Earnings Ratio?

The formula for P/E is:

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

Or for Bannari Amman Sugars:

P/E of 20.7 = ₹1296.2 ÷ ₹62.62 (Based on the trailing twelve months to June 2019.)

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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

Does Bannari Amman Sugars Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Bannari Amman Sugars has a higher P/E than the average company (14.3) in the food industry.

That means that the market expects Bannari Amman Sugars will outperform other companies in its industry.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. 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.

Bannari Amman Sugars shrunk earnings per share by 7.4% last year. But it has grown its earnings per share by 27% per year over the last five years. And over the longer term (3 years) earnings per share have decreased 12% annually. So it would be surprising to see a high P/E.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. 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.

How Does Bannari Amman Sugars's Debt Impact Its P/E Ratio?

Bannari Amman Sugars's net debt equates to 49% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.

The Bottom Line On Bannari Amman Sugars's P/E Ratio

Bannari Amman Sugars trades on a P/E ratio of 20.7, which is above its market average of 13.4. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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 be able to find a better stock than Bannari Amman Sugars. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.