This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at JK Lakshmi Cement Limited’s (NSE:JKLAKSHMI) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, JK Lakshmi Cement’s P/E ratio is 59.57. That means that at current prices, buyers pay ₹59.57 for every ₹1 in trailing yearly profits.

See our latest analysis for JK Lakshmi Cement

How Do I Calculate JK Lakshmi Cement’s Price To Earnings Ratio?

The formula for P/E is:

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

Or for JK Lakshmi Cement:

P/E of 59.57 = ₹279.65 ÷ ₹4.69 (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. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.

JK Lakshmi Cement saw earnings per share decrease by 36% last year. And it has shrunk its earnings per share by 24% per year over the last five years. This could justify a pessimistic P/E.

How Does JK Lakshmi Cement’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (19.7) for companies in the basic materials industry is a lot lower than JK Lakshmi Cement’s P/E.

That means that the market expects JK Lakshmi Cement 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.

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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

Is Debt Impacting JK Lakshmi Cement’s P/E?

Net debt totals 63% of JK Lakshmi Cement’s market cap. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.

The Bottom Line On JK Lakshmi Cement’s P/E Ratio

JK Lakshmi Cement’s P/E is 59.6 which is way above average (16.9) in the IN market. With significant debt and no EPS growth last year, shareholders are betting on an improvement in earnings from the company.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

Of course you might be able to find a better stock than JK Lakshmi Cement. 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 editorial-team@simplywallst.com.