Here’s How P/E Ratios Can Help Us Understand Manali Petrochemicals Limited (NSE:MANALIPETC)
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Manali Petrochemicals Limited’s (NSE:MANALIPETC) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Manali Petrochemicals’s P/E ratio is 8.76. That corresponds to an earnings yield of approximately 11%.
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How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Manali Petrochemicals:
P/E of 8.76 = ₹29.5 ÷ ₹3.37 (Based on the year to March 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each ₹1 the company has earned over the last year. 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 Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Notably, Manali Petrochemicals grew EPS by a whopping 46% in the last year. And it has bolstered its earnings per share by 18% per year over the last five years. So we’d generally expect it to have a relatively high P/E ratio.
How Does Manali Petrochemicals’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Manali Petrochemicals has a lower P/E than the average (16.1) P/E for companies in the chemicals industry.
Manali Petrochemicals’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.
Remember: P/E Ratios Don’t Consider The Balance Sheet
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).
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.
Manali Petrochemicals’s Balance Sheet
The extra options and safety that comes with Manali Petrochemicals’s ₹353m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On Manali Petrochemicals’s P/E Ratio
Manali Petrochemicals’s P/E is 8.8 which is below average (17) in the IN market. It grew its EPS nicely over the last year, and the healthy balance sheet implies there is more potential for growth. One might conclude that the market is a bit pessimistic, given the low P/E ratio. Since analysts are predicting growth will continue, one might expect to see a higher P/E so it may be worth looking closer.
Investors have an opportunity when market expectations about a stock are wrong. 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.
You might be able to find a better buy than Manali Petrochemicals. 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 editorial-team@simplywallst.com.
