Thest. luke catholic church smyrna mass times goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how STEL Holdings Limited’s (

NSE:STEL

) P/E ratio could help you assess the value on offer.

STEL Holdings has a P/E ratio of 34.6

, based on the last twelve months. That is equivalent to an earnings yield of about 2.9%.

Check out our latest analysis for STEL Holdings

How Do I Calculate A Price To Earnings Ratio?

The

formula for price to earnings

is:

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

Or for STEL Holdings:

P/E of 34.6 = ₹107.75 ÷ ₹3.11 (Based on the trailing twelve months to March 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

Earnings growth rates have a big influence on P/E ratios. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

STEL Holdings increased earnings per share by a whopping 325% last year. And it has bolstered its earnings per share by 7.1% per year over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.

How Does STEL Holdings’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, STEL Holdings has a higher P/E than the average company (17.9) in the capital markets industry.

NSEI:STEL PE PEG Gauge January 2nd 19

That means that the market expects STEL Holdings will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So investors should delve deeper. I like to check

if company insiders have been buying or selling

.

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

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 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.

Story continues

Is Debt Impacting STEL Holdings’s P/E?

Since STEL Holdings holds net cash of ₹144m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On STEL Holdings’s P/E Ratio

STEL Holdings has a P/E of 34.6. That’s higher than the average in the IN market, which is 17.2. 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. Although we don’t have analyst forecasts, shareholders might want to examine

this detailed historical graph

of earnings, revenue and cash flow.

Of course

you might be able to find a better stock than STEL Holdings

. So you may wish to see this

free

collection of other companies that have grown earnings strongly.

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

[email protected]

.

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