Is Hindustan Copper Limited's (NSE:HINDCOPPER) High P/E Ratio A Problem For Investors?

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Hindustan Copper Limited's (NSE:HINDCOPPER) P/E ratio and reflect on what it tells us about the company's share price. Hindustan Copper has a price to earnings ratio of 36.36, based on the last twelve months. That means that at current prices, buyers pay ₹36.36 for every ₹1 in trailing yearly profits.

See our latest analysis for Hindustan Copper

How Do I Calculate Hindustan Copper's Price To Earnings Ratio?

The formula for P/E is:

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

Or for Hindustan Copper:

P/E of 36.36 = ₹50 ÷ ₹1.38 (Based on the trailing twelve months to December 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about 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. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Hindustan Copper increased earnings per share by a whopping 29% last year. And earnings per share have improved by 33% annually, over the last three years. So we'd generally expect it to have a relatively high P/E ratio. Unfortunately, earnings per share are down 18% a year, over 5 years.

How Does Hindustan Copper's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. As you can see below, Hindustan Copper has a much higher P/E than the average company (11.4) in the metals and mining industry.

Its relatively high P/E ratio indicates that Hindustan Copper shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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 spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

Hindustan Copper's Balance Sheet

Net debt totals 17% of Hindustan Copper's market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.

The Verdict On Hindustan Copper's P/E Ratio

Hindustan Copper trades on a P/E ratio of 36.4, which is above the IN market average of 16.3. While the company does use modest debt, its recent earnings growth is very good. So on this analysis it seems reasonable that its P/E ratio is above average.

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 freevisual report on analyst forecasts could hold the key to an excellent investment decision.

But note: Hindustan Copper may not be the best stock to buy. So take a peek at this freelist of interesting companies with strong recent earnings growth (and a P/E ratio 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. Thank you for reading.