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 Edelweiss Financial Services Limited’s (NSE:EDELWEISS) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Edelweiss Financial Services’s P/E ratio is 16.22. That means that at current prices, buyers pay ₹16.22 for every ₹1 in trailing yearly profits.
How Do I Calculate Edelweiss Financial Services’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Edelweiss Financial Services:
P/E of 16.22 = ₹179.45 ÷ ₹11.07 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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
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 unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
It’s great to see that Edelweiss Financial Services grew EPS by 16% in the last year. And it has bolstered its earnings per share by 32% per year over the last five years. With that performance, you might expect an above average P/E ratio.
Does Edelweiss Financial Services Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Edelweiss Financial Services has a higher P/E than the average company (14.9) in the capital markets industry.
Edelweiss Financial Services’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).
While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
How Does Edelweiss Financial Services’s Debt Impact Its P/E Ratio?
Net debt totals a substantial 283% of Edelweiss Financial Services’s market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.
The Bottom Line On Edelweiss Financial Services’s P/E Ratio
Edelweiss Financial Services trades on a P/E ratio of 16.2, which is fairly close to the IN market average of 16.3. The significant levels of debt do detract somewhat from the strong earnings growth. However, the P/E ratio implies that most doubt the strong growth will continue.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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 Edelweiss Financial 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 email@example.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.