Here’s What Bharat Dynamics Limited’s (NSE:BDL) P/E Is Telling Us

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 Bharat Dynamics Limited’s (NSE:BDL) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Bharat Dynamics has a P/E ratio of 11.49. That is equivalent to an earnings yield of about 8.7%.

View our latest analysis for Bharat Dynamics

How Do You Calculate Bharat Dynamics’s P/E Ratio?

The formula for price to earnings is:

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

Or for Bharat Dynamics:

P/E of 11.49 = INR303.55 ÷ INR26.43 (Based on the trailing twelve months to September 2019.)

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 Does Bharat Dynamics’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Bharat Dynamics has a higher P/E than the average company (10.3) in the aerospace & defense industry.

NSEI:BDL Price Estimation Relative to Market, January 14th 2020
NSEI:BDL Price Estimation Relative to Market, January 14th 2020

That means that the market expects Bharat Dynamics will outperform other companies in its industry. The market is optimistic about the future, but that doesn’t guarantee future growth. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

Bharat Dynamics’s earnings per share grew by -6.9% in the last twelve months. And earnings per share have improved by 13% annually, over the last five years.

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 investing in growth. That means taking on debt (or spending its 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.

Is Debt Impacting Bharat Dynamics’s P/E?

Bharat Dynamics has net cash of ₹25b. This is fairly high at 45% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Bottom Line On Bharat Dynamics’s P/E Ratio

Bharat Dynamics trades on a P/E ratio of 11.5, which is below the IN market average of 13.6. Earnings improved over the last year. Also positive, the relatively strong balance sheet will allow for investment in growth. In contrast, the P/E indicates shareholders doubt that will happen!

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. 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.

Of course you might be able to find a better stock than Bharat Dynamics. 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 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.

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. Thank you for reading.