Don’t Sell Eris Lifesciences Limited (NSE:ERIS) Before You Read This

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Eris Lifesciences Limited’s (NSE:ERIS) P/E ratio and reflect on what it tells us about the company’s share price. Eris Lifesciences has a P/E ratio of 30.54, based on the last twelve months. That is equivalent to an earnings yield of about 3.3%.

View our latest analysis for Eris Lifesciences

How Do I Calculate Eris Lifesciences’s Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Eris Lifesciences:

P/E of 30.54 = ₹649.5 ÷ ₹21.27 (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

P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

Eris Lifesciences’s earnings per share grew by -4.5% in the last twelve months. And its annual EPS growth rate over 5 years is 25%.

How Does Eris Lifesciences’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Eris Lifesciences has a higher P/E than the average (19) P/E for companies in the pharmaceuticals industry.

NSEI:ERIS Price Estimation Relative to Market, March 12th 2019
NSEI:ERIS Price Estimation Relative to Market, March 12th 2019

That means that the market expects Eris Lifesciences will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

Eris Lifesciences’s Balance Sheet

Eris Lifesciences has net debt worth just 2.2% of its market capitalization. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

The Bottom Line On Eris Lifesciences’s P/E Ratio

Eris Lifesciences trades on a P/E ratio of 30.5, which is above the IN market average of 16.6. Given the debt is only modest, and earnings are already moving in the right direction, it’s not surprising that the market expects continued improvement.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Eris Lifesciences may not be the best stock to buy. So take a peek at this free list 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.