Why Dishman Carbogen Amcis Limited's (NSE:DCAL) High P/E Ratio Isn't Necessarily A Bad Thing

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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Dishman Carbogen Amcis Limited's (NSE:DCAL), to help you decide if the stock is worth further research. What is Dishman Carbogen Amcis's P/E ratio? Well, based on the last twelve months it is 18.66. That is equivalent to an earnings yield of about 5.4%.

See our latest analysis for Dishman Carbogen Amcis

How Do You Calculate Dishman Carbogen Amcis's P/E Ratio?

The formula for P/E is:

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

Or for Dishman Carbogen Amcis:

P/E of 18.66 = ₹215.1 ÷ ₹11.53 (Based on the year to December 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each ₹1 of company earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.

Most would be impressed by Dishman Carbogen Amcis earnings growth of 21% in the last year. In contrast, EPS has decreased by 31%, annually, over 3 years.

Does Dishman Carbogen Amcis Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (17.8) for companies in the life sciences industry is roughly the same as Dishman Carbogen Amcis's P/E.

Its P/E ratio suggests that Dishman Carbogen Amcis shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.

So What Does Dishman Carbogen Amcis's Balance Sheet Tell Us?

Dishman Carbogen Amcis's net debt equates to 26% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On Dishman Carbogen Amcis's P/E Ratio

Dishman Carbogen Amcis has a P/E of 18.7. That's higher than the average in the IN market, which is 15.6. While the company does use modest debt, its recent earnings growth is very good. Therefore, it's not particularly surprising that it has a above average P/E ratio.

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

But note: Dishman Carbogen Amcis 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.