【5e dinosaurs by cr】Don’t Sell SORIL Infra Resources Limited (NSE:SORILINFRA) Before You Read This

The5e dinosaurs by cr goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how SORIL Infra Resources Limited’s (

NSE:SORILINFRA

) P/E ratio could help you assess the value on offer.

SORIL Infra Resources has a P/E ratio of 63.7

, based on the last twelve months. That is equivalent to an earnings yield of about 1.6%.

View our latest analysis for SORIL Infra Resources

How Do I Calculate SORIL Infra Resources’s Price To Earnings Ratio?

The

formula for P/E

is:

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

Or for SORIL Infra Resources:

P/E of 63.7 = ₹390.95 ÷ ₹6.14 (Based on the year 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

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

SORIL Infra Resources shrunk earnings per share by 47% over the last year. But EPS is up 4.4% over the last 3 years. And EPS is down 17% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.

How Does SORIL Infra Resources’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below, SORIL Infra Resources has a much higher P/E than the average company (16.9) in the commercial services industry.

NSEI:SORILINFRA PE PEG Gauge January 2nd 19

That means that the market expects SORIL Infra Resources will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as

whether company directors have been buying shares

.

Remember: P/E Ratios Don’t Consider The Balance Sheet

The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

Story continues

How Does SORIL Infra Resources’s Debt Impact Its P/E Ratio?

Net debt totals 25% of SORIL Infra Resources’s market cap. 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 SORIL Infra Resources’s P/E Ratio

SORIL Infra Resources’s P/E is 63.7 which is way above average (17.2) in the IN market. With a bit of debt, but a lack of recent growth, it’s safe to say the market is expecting improved profit performance from the company, in the next few years.

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. We don’t have analyst forecasts, but shareholders might want to examine

this detailed historical graph

of earnings, revenue and cash flow.

You might be able to find a better buy than SORIL Infra Resources. 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).

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

[email protected]

.

View comments