Is Security and Intelligence Services (India) Limited's (NSE:SIS) High P/E Ratio A Problem For Investors?
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 Security and Intelligence Services (India) Limited's (NSE:SIS) P/E ratio to inform your assessment of the investment opportunity. Security and Intelligence Services (India) has a P/E ratio of 34.74, based on the last twelve months. That means that at current prices, buyers pay ₹34.74 for every ₹1 in trailing yearly profits.
Check out our latest analysis for Security and Intelligence Services (India)
How Do I Calculate Security and Intelligence Services (India)'s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Security and Intelligence Services (India):
P/E of 34.74 = ₹837.35 ÷ ₹24.1 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each ₹1 of company earnings. 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. Earnings growth means that in the future the 'E' will be higher. 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.
Security and Intelligence Services (India)'s earnings per share grew by -3.9% in the last twelve months. And its annual EPS growth rate over 5 years is 19%.
Does Security and Intelligence Services (India) Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Security and Intelligence Services (India) has a higher P/E than the average (14.9) P/E for companies in the commercial services industry.
Its relatively high P/E ratio indicates that Security and Intelligence Services (India) shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Security and Intelligence Services (India)'s Balance Sheet
Security and Intelligence Services (India) has net cash of ₹1.6b. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Bottom Line On Security and Intelligence Services (India)'s P/E Ratio
Security and Intelligence Services (India) trades on a P/E ratio of 34.7, which is above the IN market average of 16.1. EPS was up modestly better over the last twelve months. Also positive, the relatively strong balance sheet will allow for investment in growth -- and the P/E indicates shareholders that will happen!
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' So this freevisualization 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 Security and Intelligence Services (India). So you may wish to see this freecollection of other companies that have grown earnings strongly.
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.