The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Capacit’e Infraprojects Limited’s (NSE:CAPACITE) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Capacit’e Infraprojects’s P/E ratio is 15.91. That means that at current prices, buyers pay ₹15.91 for every ₹1 in trailing yearly profits.
Check out our latest analysis for Capacit’e Infraprojects
How Do You Calculate Capacit’e Infraprojects’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Capacit’e Infraprojects:
P/E of 15.91 = ₹220.35 ÷ ₹13.85 (Based on the year to March 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Capacit’e Infraprojects saw earnings per share decrease by 19% last year. But over the longer term (5 years) earnings per share have increased by 39%.
How Does Capacit’e Infraprojects’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Capacit’e Infraprojects has a lower P/E than the average (18.3) P/E for companies in the real estate industry.
Its relatively low P/E ratio indicates that Capacit’e Infraprojects shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You 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
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Capacit’e Infraprojects’s Balance Sheet
The extra options and safety that comes with Capacit’e Infraprojects’s ₹841m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On Capacit’e Infraprojects’s P/E Ratio
Capacit’e Infraprojects’s P/E is 15.9 which is below average (17.3) in the IN market. The recent drop in earnings per share would almost certainly temper expectations, but the net cash position means the company has time to improve: if so, the low P/E could be an opportunity.
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 visual report on analyst forecasts could hold they key to an excellent investment decision.
Of course you might be able to find a better stock than Capacit’e Infraprojects. 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 editorial-team@simplywallst.com.