Despite Its High P/E Ratio, Is Kingfa Science & Technology (India) Limited (NSE:KINGFA) Still Undervalued?

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Kingfa Science & Technology (India) Limited's (NSE:KINGFA) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Kingfa Science & Technology (India)'s P/E ratio is 26.84. That means that at current prices, buyers pay ₹26.84 for every ₹1 in trailing yearly profits.

Check out our latest analysis for Kingfa Science & Technology (India)

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Kingfa Science & Technology (India):

P/E of 26.84 = ₹638.25 ÷ ₹23.78 (Based on the trailing twelve months to June 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 Does Kingfa Science & Technology (India)'s P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Kingfa Science & Technology (India) has a higher P/E than the average (11.2) P/E for companies in the chemicals industry.

Its relatively high P/E ratio indicates that Kingfa Science & Technology (India) shareholders think it will perform better than other companies in its industry classification. 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.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

It's nice to see that Kingfa Science & Technology (India) grew EPS by a stonking 32% in the last year. And it has improved its earnings per share by 15% per year over the last three years. So we'd generally expect it to have a relatively high P/E ratio.

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

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. 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 Kingfa Science & Technology (India)'s Debt Impact Its P/E Ratio?

The extra options and safety that comes with Kingfa Science & Technology (India)'s ₹396m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Bottom Line On Kingfa Science & Technology (India)'s P/E Ratio

Kingfa Science & Technology (India) has a P/E of 26.8. That's higher than the average in its market, which is 14.0. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect Kingfa Science & Technology (India) to have a high P/E ratio.

Investors should be looking to buy stocks that the market is wrong about. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

But note: Kingfa Science & Technology (India) 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.