Does Genus Power Infrastructures Limited (NSE:GENUSPOWER) Have A Good P/E Ratio?

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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Genus Power Infrastructures Limited's (NSE:GENUSPOWER) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Genus Power Infrastructures has a P/E ratio of 10.26. That is equivalent to an earnings yield of about 9.7%.

See our latest analysis for Genus Power Infrastructures

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Genus Power Infrastructures:

P/E of 10.26 = ₹21.45 ÷ ₹2.09 (Based on the trailing twelve months to March 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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.'

Does Genus Power Infrastructures 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. If you look at the image below, you can see Genus Power Infrastructures has a lower P/E than the average (14.8) in the electronic industry classification.

Genus Power Infrastructures's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Genus Power Infrastructures, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Genus Power Infrastructures shrunk earnings per share by 43% over the last year. And EPS is down 8.4% a year, over the last 5 years. This could justify a pessimistic P/E.

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

The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

So What Does Genus Power Infrastructures's Balance Sheet Tell Us?

Net debt totals 12% of Genus Power Infrastructures's market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

The Bottom Line On Genus Power Infrastructures's P/E Ratio

Genus Power Infrastructures trades on a P/E ratio of 10.3, which is below the IN market average of 14.9. With only modest debt, it's likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than Genus Power Infrastructures. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.