Should We Worry About Alkyl Amines Chemicals Limited's (NSE:ALKYLAMINE) 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). We'll look at Alkyl Amines Chemicals Limited's (NSE:ALKYLAMINE) P/E ratio and reflect on what it tells us about the company's share price. Alkyl Amines Chemicals has a P/E ratio of 19.9, based on the last twelve months. In other words, at today's prices, investors are paying ₹19.9 for every ₹1 in prior year profit.

Check out our latest analysis for Alkyl Amines Chemicals

How Do You Calculate Alkyl Amines Chemicals's P/E Ratio?

The formula for price to earnings is:

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

Or for Alkyl Amines Chemicals:

P/E of 19.9 = ₹801.35 ÷ ₹40.26 (Based on the year to March 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 Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Alkyl Amines Chemicals increased earnings per share by an impressive 24% over the last twelve months. And earnings per share have improved by 14% annually, over the last five years. With that performance, you might expect an above average P/E ratio.

Does Alkyl Amines Chemicals Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. The image below shows that Alkyl Amines Chemicals has a higher P/E than the average (13.3) P/E for companies in the chemicals industry.

That means that the market expects Alkyl Amines Chemicals 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. 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.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Is Debt Impacting Alkyl Amines Chemicals's P/E?

Alkyl Amines Chemicals has net debt worth just 6.6% of its market capitalization. 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 Alkyl Amines Chemicals's P/E Ratio

Alkyl Amines Chemicals's P/E is 19.9 which is above average (15.4) in the IN market. The company is not overly constrained by its modest debt levels, and its recent EPS growth very solid. Therefore, it's not particularly surprising that it has a above average P/E ratio.

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.

But note: Alkyl Amines Chemicals may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.