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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 Bhansali Engineering Polymers Limited’s (NSE:BEPL) P/E ratio and reflect on what it tells us about the company’s share price. Looking at earnings over the last twelve months, Bhansali Engineering Polymers has a P/E ratio of 20.86. That means that at current prices, buyers pay ₹20.86 for every ₹1 in trailing yearly profits.
How Do I Calculate Bhansali Engineering Polymers’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Bhansali Engineering Polymers:
P/E of 20.86 = ₹59.45 ÷ ₹2.85 (Based on the year to March 2019.)
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
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Bhansali Engineering Polymers shrunk earnings per share by 53% over the last year. But over the longer term (5 years) earnings per share have increased by 100%.
Does Bhansali Engineering Polymers Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Bhansali Engineering Polymers has a higher P/E than the average (13.6) P/E for companies in the chemicals industry.
Its relatively high P/E ratio indicates that Bhansali Engineering Polymers shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
So What Does Bhansali Engineering Polymers’s Balance Sheet Tell Us?
The extra options and safety that comes with Bhansali Engineering Polymers’s ₹310m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On Bhansali Engineering Polymers’s P/E Ratio
Bhansali Engineering Polymers has a P/E of 20.9. That’s higher than the average in the IN market, which is 15.6. The recent drop in earnings per share would make some investors cautious, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will!
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.’ 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.
Of course you might be able to find a better stock than Bhansali Engineering Polymers. 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 firstname.lastname@example.org. 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.