Despite Its High P/E Ratio, Is TeamLease Services Limited (NSE:TEAMLEASE) Still Undervalued?

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use TeamLease Services Limited's (NSE:TEAMLEASE) P/E ratio to inform your assessment of the investment opportunity. TeamLease Services has a price to earnings ratio of 48.66, based on the last twelve months. That is equivalent to an earnings yield of about 2.1%.

View our latest analysis for TeamLease Services

How Do I Calculate TeamLease Services's Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for TeamLease Services:

P/E of 48.66 = ₹2789.9 ÷ ₹57.34 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each ₹1 the company has earned over the last year. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'

How Does TeamLease Services'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, TeamLease Services has a higher P/E than the average company (19.5) in the professional services industry.

That means that the market expects TeamLease Services will outperform other companies in its industry.

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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

It's nice to see that TeamLease Services grew EPS by a stonking 33% in the last year. And earnings per share have improved by 38% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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).

Is Debt Impacting TeamLease Services's P/E?

Since TeamLease Services holds net cash of ₹2.6b, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On TeamLease Services's P/E Ratio

TeamLease Services's P/E is 48.7 which is way above average (14.3) in its market. The excess cash it carries is the gravy on top its fast EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings).

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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 TeamLease Services. So you may wish to see this free collection 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.