The 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 8K Miles Software Services Limited’s (NSE:8KMILES) P/E ratio could help you assess the value on offer. Based on the last twelve months, 8K Miles Software Services’s P/E ratio is 1.41. That corresponds to an earnings yield of approximately 71.0%.
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 8K Miles Software Services:
P/E of 1.41 = INR31.70 ÷ INR22.52 (Based on the year to March 2019.)
Is A High P/E 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.
Does 8K Miles Software Services Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that 8K Miles Software Services has a lower P/E than the average (11.2) P/E for companies in the software industry.
This suggests that market participants think 8K Miles Software Services will underperform other companies in its industry. Since the market seems unimpressed with 8K Miles Software Services, it’s quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
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. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
8K Miles Software Services’s earnings per share fell by 60% in the last twelve months. But EPS is up 58% over the last 5 years.
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. So it won’t reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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).
How Does 8K Miles Software Services’s Debt Impact Its P/E Ratio?
Net debt totals a substantial 114% of 8K Miles Software Services’s market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you’re comparing it to other stocks.
The Bottom Line On 8K Miles Software Services’s P/E Ratio
8K Miles Software Services’s P/E is 1.4 which is below average (13.3) in the IN market. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don’t have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.
Of course you might be able to find a better stock than 8K Miles Software Services. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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