What Does Linc Pen & Plastics Limited's (NSE:LINCPEN) P/E Ratio Tell You?

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Linc Pen & Plastics Limited's (NSE:LINCPEN) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Linc Pen & Plastics's P/E ratio is 22.63. That is equivalent to an earnings yield of about 4.4%.

View our latest analysis for Linc Pen & Plastics

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 Linc Pen & Plastics:

P/E of 22.63 = ₹184.35 ÷ ₹8.15 (Based on the year to September 2019.)

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 Does Linc Pen & Plastics'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, Linc Pen & Plastics has a higher P/E than the average company (13.5) in the commercial services industry.

Its relatively high P/E ratio indicates that Linc Pen & Plastics 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 investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.

Notably, Linc Pen & Plastics grew EPS by a whopping 33% in the last year. In contrast, EPS has decreased by 4.3%, annually, over 5 years.

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

Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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.

How Does Linc Pen & Plastics's Debt Impact Its P/E Ratio?

Linc Pen & Plastics has net debt worth 20% of its market capitalization. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.

The Bottom Line On Linc Pen & Plastics's P/E Ratio

Linc Pen & Plastics's P/E is 22.6 which is above average (13.1) in its market. While the company does use modest debt, its recent earnings growth is superb. So on this analysis a high P/E ratio seems reasonable.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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 Linc Pen & Plastics. 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.