Despite Its High P/E Ratio, Is Shubhlaxmi Jewel Art Limited (NSE:SHUBHLAXMI) Still Undervalued?

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 Shubhlaxmi Jewel Art Limited’s (NSE:SHUBHLAXMI) P/E ratio to inform your assessment of the investment opportunity. Shubhlaxmi Jewel Art has a P/E ratio of 40.81, based on the last twelve months. In other words, at today’s prices, investors are paying ₹40.81 for every ₹1 in prior year profit.

Check out our latest analysis for Shubhlaxmi Jewel Art

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for Shubhlaxmi Jewel Art:

P/E of 40.81 = ₹58 ÷ ₹1.42 (Based on the trailing twelve months to March 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.

How Growth Rates Impact P/E Ratios

When earnings fall, the ‘E’ decreases, over time. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Shubhlaxmi Jewel Art increased earnings per share by a whopping 27% last year. And it has bolstered its earnings per share by 15% per year over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high. In contrast, EPS has decreased by 14%, annually, over 3 years.

How Does Shubhlaxmi Jewel Art’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Shubhlaxmi Jewel Art has a higher P/E than the average (20.1) P/E for companies in the specialty retail industry.

That means that the market expects Shubhlaxmi Jewel Art will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

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

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

How Does Shubhlaxmi Jewel Art’s Debt Impact Its P/E Ratio?

Shubhlaxmi Jewel Art has net debt worth 20% of its market capitalization. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

The Bottom Line On Shubhlaxmi Jewel Art’s P/E Ratio

Shubhlaxmi Jewel Art’s P/E is 40.8 which is above average (16.2) in the IN market. Its debt levels do not imperil its balance sheet and it has already proven it can grow. So it does not seem strange that the P/E is above average.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. We don’t have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.