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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 Deepak Fertilisers And Petrochemicals Corporation Limited’s (NSE:DEEPAKFERT) P/E ratio and reflect on what it tells us about the company’s share price. Deepak Fertilisers And Petrochemicals has a P/E ratio of 10.53, based on the last twelve months. That means that at current prices, buyers pay ₹10.53 for every ₹1 in trailing yearly profits.
See our latest analysis for Deepak Fertilisers And Petrochemicals
How Do I Calculate Deepak Fertilisers And Petrochemicals’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Deepak Fertilisers And Petrochemicals:
P/E of 10.53 = ₹117.5 ÷ ₹11.16 (Based on the year to December 2018.)
Is A High Price-to-Earnings 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 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
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Deepak Fertilisers And Petrochemicals saw earnings per share decrease by 49% last year. And it has shrunk its earnings per share by 2.6% per year over the last five years. This might lead to muted expectations.
How Does Deepak Fertilisers And Petrochemicals’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (14.6) for companies in the chemicals industry is higher than Deepak Fertilisers And Petrochemicals’s P/E.
Deepak Fertilisers And Petrochemicals’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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.
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 Deepak Fertilisers And Petrochemicals’s Debt Impact Its P/E Ratio?
Deepak Fertilisers And Petrochemicals’s net debt is considerable, at 277% of its market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.
The Bottom Line On Deepak Fertilisers And Petrochemicals’s P/E Ratio
Deepak Fertilisers And Petrochemicals trades on a P/E ratio of 10.5, which is below the IN market average of 15.2. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
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.
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. On rare occasion, data errors may occur. Thank you for reading.