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Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll look at Gulf Oil Lubricants India Limited’s (NSE:GULFOILLUB) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Gulf Oil Lubricants India’s P/E ratio is 23.97. That is equivalent to an earnings yield of about 4.2%.
How Do You Calculate Gulf Oil Lubricants India’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Gulf Oil Lubricants India:
P/E of 23.97 = ₹826.75 ÷ ₹34.5 (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 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. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Most would be impressed by Gulf Oil Lubricants India earnings growth of 13% in the last year. And it has improved its earnings per share by 23% per year over the last three years. With that performance, you might expect an above average P/E ratio.
How Does Gulf Oil Lubricants India’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Gulf Oil Lubricants India has a higher P/E than the average (15.2) P/E for companies in the chemicals industry.
Its relatively high P/E ratio indicates that Gulf Oil Lubricants 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.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. So it won’t reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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.
Gulf Oil Lubricants India’s Balance Sheet
Since Gulf Oil Lubricants India holds net cash of ₹298m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On Gulf Oil Lubricants India’s P/E Ratio
Gulf Oil Lubricants India has a P/E of 24. That’s higher than the average in the IN market, which is 15.7. Its net cash position supports a higher P/E ratio, as does its solid recent earnings growth. So it is not surprising the market is probably extrapolating recent growth well into the future, reflected in the relatively high P/E ratio.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
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 email@example.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.