Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to TAJGVK Hotels & Resorts Limited's (NSE:TAJGVK), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, TAJGVK Hotels & Resorts has a P/E ratio of 58.47. In other words, at today's prices, investors are paying ₹58.47 for every ₹1 in prior year profit.
How Do I Calculate TAJGVK Hotels & Resorts's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for TAJGVK Hotels & Resorts:
P/E of 58.47 = ₹223.7 ÷ ₹3.83 (Based on the trailing twelve months 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. 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. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
TAJGVK Hotels & Resorts's earnings made like a rocket, taking off 136% last year. The cherry on top is that the five year growth rate was an impressive 107% per year. With that kind of growth rate we would generally expect a high P/E ratio.
How Does TAJGVK Hotels & Resorts'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, TAJGVK Hotels & Resorts has a higher P/E than the average company (23.8) in the hospitality industry.
Its relatively high P/E ratio indicates that TAJGVK Hotels & Resorts shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. 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 TAJGVK Hotels & Resorts's Balance Sheet Tell Us?
TAJGVK Hotels & Resorts's net debt is 13% of its market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.
The Bottom Line On TAJGVK Hotels & Resorts's P/E Ratio
With a P/E ratio of 58.5, TAJGVK Hotels & Resorts is expected to grow earnings very strongly in the years to come. While the company does use modest debt, its recent earnings growth is superb. So on this analysis a high P/E ratio seems reasonable.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than TAJGVK Hotels & Resorts. 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).
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 email@example.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.