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Is TTK Healthcare Limited’s (NSE:TTKHEALTH) High P/E Ratio A Problem For Investors?

Simply Wall St

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use TTK Healthcare Limited’s (NSE:TTKHEALTH) P/E ratio to inform your assessment of the investment opportunity. TTK Healthcare has a P/E ratio of 47.46, based on the last twelve months. That means that at current prices, buyers pay ₹47.46 for every ₹1 in trailing yearly profits.

See our latest analysis for TTK Healthcare

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for TTK Healthcare:

P/E of 47.46 = ₹688.05 ÷ ₹14.5 (Based on the trailing twelve months to December 2018.)

Is A High P/E 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

When earnings fall, the ‘E’ decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

TTK Healthcare saw earnings per share decrease by 29% last year. But EPS is up 1.5% over the last 5 years. And EPS is down 17% a year, over the last 3 years. This could justify a low P/E.

How Does TTK Healthcare’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, TTK Healthcare has a higher P/E than the average company (19.8) in the pharmaceuticals industry.

NSEI:TTKHEALTH Price Estimation Relative to Market, March 15th 2019

That means that the market expects TTK Healthcare will outperform other companies in its industry. 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.

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

The ‘Price’ in P/E reflects the market capitalization of the company. 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 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.

How Does TTK Healthcare’s Debt Impact Its P/E Ratio?

TTK Healthcare has net cash of ₹963m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Verdict On TTK Healthcare’s P/E Ratio

TTK Healthcare trades on a P/E ratio of 47.5, which is above the IN market average of 16.7. The recent drop in earnings per share would make some investors cautious, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will!

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. Although we don’t have analyst forecasts, you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

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.