Despite Its High P/E Ratio, Is Nath Bio-Genes (India) Limited (NSE:NATHBIOGEN) Still Undervalued?

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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Nath Bio-Genes (India) Limited's (NSE:NATHBIOGEN) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Nath Bio-Genes (India)'s P/E ratio is 19.23. That means that at current prices, buyers pay ₹19.23 for every ₹1 in trailing yearly profits.

Check out our latest analysis for Nath Bio-Genes (India)

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for Nath Bio-Genes (India):

P/E of 19.23 = ₹357.6 ÷ ₹18.6 (Based on the trailing twelve months to December 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each ₹1 the company has earned over the last year. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

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. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Most would be impressed by Nath Bio-Genes (India) earnings growth of 17% in the last year. And its annual EPS growth rate over 5 years is 18%. With that performance, you might expect an above average P/E ratio.

How Does Nath Bio-Genes (India)'s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Nath Bio-Genes (India) has a higher P/E than the average (17.5) P/E for companies in the food industry.

Its relatively high P/E ratio indicates that Nath Bio-Genes (India) shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.

Remember: P/E Ratios Don't Consider The Balance Sheet

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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

How Does Nath Bio-Genes (India)'s Debt Impact Its P/E Ratio?

Nath Bio-Genes (India) has net debt worth just 0.9% of its market capitalization. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

The Verdict On Nath Bio-Genes (India)'s P/E Ratio

Nath Bio-Genes (India)'s P/E is 19.2 which is above average (16.1) in the IN market. The company is not overly constrained by its modest debt levels, and it is growing earnings per share. Therefore it seems reasonable that the market would have relatively high expectations of the company

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 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 freelist 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.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.