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 Apex Frozen Foods Limited's (NSE:APEX) P/E ratio to inform your assessment of the investment opportunity. Apex Frozen Foods has a price to earnings ratio of 13.71, based on the last twelve months. That corresponds to an earnings yield of approximately 7.3%.
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 Apex Frozen Foods:
P/E of 13.71 = ₹317.2 ÷ ₹23.14 (Based on the trailing twelve months to December 2018.)
Is A High P/E 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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Apex Frozen Foods saw earnings per share decrease by 10% last year. But EPS is up 33% over the last 5 years.
Does Apex Frozen Foods Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (18.5) for companies in the food industry is higher than Apex Frozen Foods's P/E.
Its relatively low P/E ratio indicates that Apex Frozen Foods shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Apex Frozen Foods, it's quite possible it could surprise on the upside. You 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
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. 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.
Is Debt Impacting Apex Frozen Foods's P/E?
Net debt totals just 9.4% of Apex Frozen Foods's market cap. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.
The Bottom Line On Apex Frozen Foods's P/E Ratio
Apex Frozen Foods trades on a P/E ratio of 13.7, which is below the IN market average of 16.1. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' We don't have analyst forecasts, but 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 be able to find a better stock than Apex Frozen Foods. 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 email@example.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.