U.S. Markets closed

Should You Be Tempted To Sell Apcotex Industries Limited (NSE:APCOTEXIND) Because Of Its P/E Ratio?

Simply Wall St

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Apcotex Industries Limited's (NSE:APCOTEXIND) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Apcotex Industries has a P/E ratio of 23.12. In other words, at today's prices, investors are paying ₹23.12 for every ₹1 in prior year profit.

View our latest analysis for Apcotex Industries

How Do I Calculate Apcotex Industries's Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Apcotex Industries:

P/E of 23.12 = ₹207.8 ÷ ₹8.99 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each ₹1 of company earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.

Does Apcotex Industries 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. The image below shows that Apcotex Industries has a higher P/E than the average (12.7) P/E for companies in the chemicals industry.

NSEI:APCOTEXIND Price Estimation Relative to Market, July 16th 2019

Its relatively high P/E ratio indicates that Apcotex Industries 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 further research is always essential. 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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Apcotex Industries increased earnings per share by an impressive 21% over the last twelve months. And earnings per share have improved by 29% annually, over the last five years. So one might expect an above average P/E ratio.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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.

Is Debt Impacting Apcotex Industries's P/E?

The extra options and safety that comes with Apcotex Industries's ₹279m 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 Apcotex Industries's P/E Ratio

Apcotex Industries trades on a P/E ratio of 23.1, which is above its market average of 14.9. Its net cash position supports a higher P/E ratio, as does its solid recent earnings growth. So it does not seem strange that the P/E is above average.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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 Apcotex Industries. 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 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.