Stock Analysis

Should We Worry About Amrutanjan Health Care Limited's (NSE:AMRUTANJAN) P/E Ratio?

  •  Updated
NSEI:AMRUTANJAN
Source: Shutterstock

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Amrutanjan Health Care Limited's (NSE:AMRUTANJAN) P/E ratio and reflect on what it tells us about the company's share price. Amrutanjan Health Care has a P/E ratio of 54.62, based on the last twelve months. That is equivalent to an earnings yield of about 1.8%.

View our latest analysis for Amrutanjan Health Care

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 Amrutanjan Health Care:

P/E of 54.62 = ₹294.9 ÷ ₹5.4 (Based on the trailing twelve months 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 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

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. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Amrutanjan Health Care shrunk earnings per share by 4.6% last year. But over the longer term (5 years) earnings per share have increased by 4.7%. And over the longer term (3 years) earnings per share have decreased 8.1% annually. So you wouldn't expect a very high P/E.

How Does Amrutanjan Health Care's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that Amrutanjan Health Care has a higher P/E than the average (18.8) P/E for companies in the pharmaceuticals industry.

NSEI:AMRUTANJAN Price Estimation Relative to Market, March 4th 2019
NSEI:AMRUTANJAN Price Estimation Relative to Market, March 4th 2019

Amrutanjan Health Care's P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

How Does Amrutanjan Health Care's Debt Impact Its P/E Ratio?

The extra options and safety that comes with Amrutanjan Health Care's ₹759m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Bottom Line On Amrutanjan Health Care's P/E Ratio

Amrutanjan Health Care has a P/E of 54.6. That's significantly higher than the average in the IN market, which is 15.8. 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!

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.

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.

About NSEI:AMRUTANJAN

Amrutanjan Health Care

Amrutanjan Health Care Limited manufactures, supplies, and sells ayurvedic pain balms, non-alcoholic beverages, and sanitary napkins.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation0
Future Growth0
Past Performance1
Financial Health6
Dividends3

Read more about these checks in the individual report sections or in our analysis model.

Flawless balance sheet second-rate dividend payer.