Is Motilal Oswal Financial Services Limited’s (NSE:MOTILALOFS) High P/E Ratio A Problem For Investors?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Motilal Oswal Financial Services Limited’s (NSE:MOTILALOFS) P/E ratio to inform your assessment of the investment opportunity. Motilal Oswal Financial Services has a P/E ratio of 40.29, based on the last twelve months. That corresponds to an earnings yield of approximately 2.5%.

See our latest analysis for Motilal Oswal Financial Services

How Do You Calculate Motilal Oswal Financial Services’s P/E Ratio?

The formula for P/E is:

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

Or for Motilal Oswal Financial Services:

P/E of 40.29 = ₹502.400 ÷ ₹12.470 (Based on the trailing twelve months to March 2020.)

(Note: the above calculation results may not be precise due to rounding.)

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. 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’.

Does Motilal Oswal 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. The image below shows that Motilal Oswal Financial Services has a significantly higher P/E than the average (9.4) P/E for companies in the capital markets industry.

NSEI:MOTILALOFS Price Estimation Relative to Market May 13th 2020
NSEI:MOTILALOFS Price Estimation Relative to Market May 13th 2020

Its relatively high P/E ratio indicates that Motilal Oswal Financial Services shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the ‘E’ will be lower. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.

Motilal Oswal Financial Services’s earnings per share fell by 38% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 3.8%. And over the longer term (3 years) earnings per share have decreased 21% annually. This could justify a low P/E.

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. So it won’t reflect the advantage of cash, or disadvantage of debt. 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 Motilal Oswal Financial Services’s P/E?

Motilal Oswal Financial Services’s net debt equates to 43% of its market capitalization. While that’s enough to warrant consideration, it doesn’t really concern us.

The Verdict On Motilal Oswal Financial Services’s P/E Ratio

Motilal Oswal Financial Services trades on a P/E ratio of 40.3, which is multiples above its market average of 10.0. With some debt but no EPS growth last year, the market has high expectations of future profits.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than Motilal Oswal Financial Services. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.