This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how Muthoot Capital Services Limited's (NSE:MUTHTFN) P/E ratio could help you assess the value on offer. Muthoot Capital Services has a P/E ratio of 11.11, based on the last twelve months. That is equivalent to an earnings yield of about 9.0%.
View our latest analysis for Muthoot Capital Services
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Muthoot Capital Services:
P/E of 11.11 = ₹530.00 ÷ ₹47.72 (Based on the year to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does Muthoot Capital Services Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Muthoot Capital Services has a lower P/E than the average (15.7) in the consumer finance industry classification.
Muthoot Capital Services's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Muthoot Capital Services, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Muthoot Capital Services saw earnings per share improve by -8.0% last year. And its annual EPS growth rate over 5 years is 25%.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. 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 Muthoot Capital Services's P/E?
Net debt totals a substantial 163% of Muthoot Capital Services's market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.
The Bottom Line On Muthoot Capital Services's P/E Ratio
Muthoot Capital Services trades on a P/E ratio of 11.1, which is below the IN market average of 13.7. It's good to see EPS growth in the last 12 months, but the debt on the balance sheet might be muting expectations.
Investors have an opportunity when market expectations about a stock are wrong. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Muthoot Capital Services may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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