Do You Like Banco Products (India) Limited (NSE:BANCOINDIA) At This P/E Ratio?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Banco Products (India) Limited’s (NSE:BANCOINDIA) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Banco Products (India)’s P/E ratio is 10.13. That is equivalent to an earnings yield of about 9.9%.

See our latest analysis for Banco Products (India)

How Do You Calculate Banco Products (India)’s P/E Ratio?

The formula for P/E is:

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

Or for Banco Products (India):

P/E of 10.13 = ₹176.1 ÷ ₹17.38 (Based on the year to September 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

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 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.

Banco Products (India) increased earnings per share by a whopping 44% last year. And earnings per share have improved by 6.5% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.

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. If you look at the image below, you can see Banco Products (India) has a lower P/E than the average (18.5) in the auto components industry classification.

NSEI:BANCOINDIA PE PEG Gauge November 1st 18
NSEI:BANCOINDIA PE PEG Gauge November 1st 18

Its relatively low P/E ratio indicates that Banco Products (India) shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

Is Debt Impacting Banco Products (India)’s P/E?

The extra options and safety that comes with Banco Products (India)’s ₹1.1b 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 Banco Products (India)’s P/E Ratio

Banco Products (India)’s P/E is 10.1 which is below average (17.4) in the IN market. Not only should the net cash position reduce risk, but the recent growth has been impressive. The below average P/E ratio suggests that market participants don’t believe the strong growth will continue.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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.

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 editorial-team@simplywallst.com.