This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Banco Products (India) Limited’s (NSE:BANCOINDIA) P/E ratio to inform your assessment of the investment opportunity. Banco Products (India) has a P/E ratio of 12.58, based on the last twelve months. That corresponds to an earnings yield of approximately 7.9%.
How Do You Calculate Banco Products (India)’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Banco Products (India):
P/E of 12.58 = ₹157.25 ÷ ₹12.5 (Based on the trailing twelve months to December 2018.)
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 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
P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Banco Products (India)’s earnings per share fell by 9.3% in the last twelve months. But EPS is up 4.6% over the last 5 years.
How Does Banco Products (India)’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (16.5) for companies in the auto components industry is higher than Banco Products (India)’s P/E.
Banco Products (India)’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. 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.
How Does Banco Products (India)’s Debt Impact Its P/E Ratio?
Banco Products (India) has net cash of ₹1.1b. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Banco Products (India)’s P/E Ratio
Banco Products (India) has a P/E of 12.6. That’s below the average in the IN market, which is 16.2. The recent drop in earnings per share would almost certainly temper expectations, but the net cash position means the company has time to improve: if so, the low P/E could be an opportunity.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
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 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. Thank you for reading.