This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Apollo Sindoori Hotels Limited’s (NSE:APOLSINHOT) P/E ratio could help you assess the value on offer. Apollo Sindoori Hotels has a price to earnings ratio of 18.26, based on the last twelve months. That is equivalent to an earnings yield of about 5.5%.
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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 Apollo Sindoori Hotels:
P/E of 18.26 = ₹1068.4 ÷ ₹58.5 (Based on the trailing twelve months to March 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. 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. 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.
Notably, Apollo Sindoori Hotels grew EPS by a whopping 26% in the last year. And earnings per share have improved by 64% annually, over the last five years. So we’d generally expect it to have a relatively high P/E ratio.
How Does Apollo Sindoori Hotels’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (24.2) for companies in the hospitality industry is higher than Apollo Sindoori Hotels’s P/E.
Apollo Sindoori Hotels’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
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. 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).
Is Debt Impacting Apollo Sindoori Hotels’s P/E?
The extra options and safety that comes with Apollo Sindoori Hotels’s ₹77m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On Apollo Sindoori Hotels’s P/E Ratio
Apollo Sindoori Hotels trades on a P/E ratio of 18.3, which is fairly close to the IN market average of 17. With a strong balance sheet combined with recent growth, the P/E implies the market is quite pessimistic.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don’t have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.
You might be able to find a better buy than Apollo Sindoori Hotels. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.