This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Central Depository Services (India) Limited’s (NSE:CDSL) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Central Depository Services (India)’s P/E ratio is 23.62. In other words, at today’s prices, investors are paying ₹23.62 for every ₹1 in prior year profit.
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How Do I Calculate Central Depository 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 Central Depository Services (India):
P/E of 23.62 = ₹232.7 ÷ ₹9.85 (Based on the year to September 2018.)
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. 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
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. 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.
Central Depository Services (India)’s earnings per share grew by -7.7% in the last twelve months. And its annual EPS growth rate over 5 years is 16%.
How Does Central Depository Services (India)’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Central Depository Services (India) has a higher P/E than the average company (16.6) in the capital markets industry.
Central Depository Services (India)’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors 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
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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 Central Depository Services (India)’s P/E?
Central Depository Services (India) has net cash of ₹2.3b. 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 Central Depository Services (India)’s P/E Ratio
Central Depository Services (India)’s P/E is 23.6 which is above average (17) in the IN market. 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 should be looking to buy stocks that the market is wrong about. 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 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 Central Depository Services (India). So you may wish to see this free collection of other companies that have grown earnings strongly.
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 firstname.lastname@example.org.