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Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll look at Talwalkars Better Value Fitness Limited’s (NSE:TALWALKARS) P/E ratio and reflect on what it tells us about the company’s share price. Looking at earnings over the last twelve months, Talwalkars Better Value Fitness has a P/E ratio of 10.19. That is equivalent to an earnings yield of about 9.8%.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Talwalkars Better Value Fitness:
P/E of 10.19 = ₹53.2 ÷ ₹5.22 (Based on the year to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each ₹1 the company has earned over the last year. 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
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. Then, a higher P/E might scare off shareholders, pushing the share price down.
Talwalkars Better Value Fitness’s 81% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. On the other hand, the longer term performance is poor, with EPS down 18% per year over 5 years.
Does Talwalkars Better Value Fitness Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (23) for companies in the hospitality industry is higher than Talwalkars Better Value Fitness’s P/E.
Its relatively low P/E ratio indicates that Talwalkars Better Value Fitness shareholders think it will struggle to do as well as other companies in its industry classification.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Talwalkars Better Value Fitness’s Balance Sheet
Talwalkars Better Value Fitness has net debt worth a very significant 150% of its market capitalization. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Bottom Line On Talwalkars Better Value Fitness’s P/E Ratio
Talwalkars Better Value Fitness’s P/E is 10.2 which is below average (15.4) in the IN market. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.
Investors should be looking to buy stocks that the market is wrong about. 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. We don’t have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.