Here’s How P/E Ratios Can Help Us Understand Gujarat State Petronet Limited (NSE:GSPL)

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 Gujarat State Petronet Limited’s (NSE:GSPL) P/E ratio to inform your assessment of the investment opportunity. What is Gujarat State Petronet’s P/E ratio? Well, based on the last twelve months it is 10.81. That is equivalent to an earnings yield of about 9.2%.

See our latest analysis for Gujarat State Petronet

How Do I Calculate Gujarat State Petronet’s Price To Earnings Ratio?

The formula for P/E is:

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

Or for Gujarat State Petronet:

P/E of 10.81 = ₹213.70 ÷ ₹19.76 (Based on the year to June 2019.)

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 Does Gujarat State Petronet’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 Gujarat State Petronet has a lower P/E than the average (14.9) P/E for companies in the gas utilities industry.

NSEI:GSPL Price Estimation Relative to Market, November 10th 2019
NSEI:GSPL Price Estimation Relative to Market, November 10th 2019

Gujarat State Petronet’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

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. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

It’s nice to see that Gujarat State Petronet grew EPS by a stonking 38% in the last year. And it has bolstered its earnings per share by 22% per year over the last five years. So we’d generally expect it to have a relatively high P/E ratio.

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

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 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.

Is Debt Impacting Gujarat State Petronet’s P/E?

Gujarat State Petronet’s net debt is 23% of its market cap. That’s enough debt to impact the P/E ratio a little; so keep it in mind if you’re comparing it to companies without debt.

The Bottom Line On Gujarat State Petronet’s P/E Ratio

Gujarat State Petronet’s P/E is 10.8 which is below average (13.3) in the IN market. The company hasn’t stretched its balance sheet, and earnings growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

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 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.