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Does Shree Pushkar Chemicals & Fertilisers Limited's (NSE:SHREEPUSHK) P/E Ratio Signal A Buying Opportunity?

Simply Wall St

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 Shree Pushkar Chemicals & Fertilisers Limited's (NSE:SHREEPUSHK) P/E ratio to inform your assessment of the investment opportunity. Shree Pushkar Chemicals & Fertilisers has a P/E ratio of 7.19, based on the last twelve months. That is equivalent to an earnings yield of about 14%.

See our latest analysis for Shree Pushkar Chemicals & Fertilisers

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Shree Pushkar Chemicals & Fertilisers:

P/E of 7.19 = ₹89.35 ÷ ₹12.42 (Based on the year to June 2019.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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 Does Shree Pushkar Chemicals & Fertilisers's P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (11.2) for companies in the chemicals industry is higher than Shree Pushkar Chemicals & Fertilisers's P/E.

NSEI:SHREEPUSHK Price Estimation Relative to Market, September 3rd 2019

Shree Pushkar Chemicals & Fertilisers'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. 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

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Shree Pushkar Chemicals & Fertilisers's earnings per share fell by 2.5% in the last twelve months. But EPS is up 20% over the last 5 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

So What Does Shree Pushkar Chemicals & Fertilisers's Balance Sheet Tell Us?

Shree Pushkar Chemicals & Fertilisers has net debt worth just 2.5% 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 Verdict On Shree Pushkar Chemicals & Fertilisers's P/E Ratio

Shree Pushkar Chemicals & Fertilisers trades on a P/E ratio of 7.2, which is below the IN market average of 13.1. With only modest debt, it's likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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.