The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Creative Peripherals and Distribution Limited’s (NSE:CREATIVE) P/E ratio to inform your assessment of the investment opportunity. Creative Peripherals and Distribution has a price to earnings ratio of 22.69, based on the last twelve months. That is equivalent to an earnings yield of about 4.4%.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Creative Peripherals and Distribution:
P/E of 22.69 = ₹113.9 ÷ ₹5.02 (Based on the trailing twelve months to March 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. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
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. 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.
Notably, Creative Peripherals and Distribution grew EPS by a whopping 50% in the last year. And its annual EPS growth rate over 5 years is 8.2%. With that performance, I would expect it to have an above average P/E ratio.
How Does Creative Peripherals and Distribution’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below Creative Peripherals and Distribution has a P/E ratio that is fairly close for the average for the electronic industry, which is 21.2.
Creative Peripherals and Distribution’s P/E tells us that market participants think its prospects are roughly in line with its industry. So if Creative Peripherals and Distribution actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
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 Creative Peripherals and Distribution’s Debt Impact Its P/E Ratio?
Creative Peripherals and Distribution has net debt worth 35% of its market capitalization. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Bottom Line On Creative Peripherals and Distribution’s P/E Ratio
Creative Peripherals and Distribution’s P/E is 22.7 which is above average (17.1) in the IN market. Its debt levels do not imperil its balance sheet and it has already proven it can grow. So it does not seem strange that the P/E is above average.
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. Although we don’t have analyst forecasts, you could get a better understanding of its growth by checking out this more detailed historical graph 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 free list of companies with modest (or no) debt, trading on a P/E below 20.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.