Do You Like Mahindra Lifespace Developers Limited (NSE:MAHLIFE) At This P/E Ratio?

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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Mahindra Lifespace Developers Limited's (NSE:MAHLIFE) P/E ratio and reflect on what it tells us about the company's share price. Mahindra Lifespace Developers has a P/E ratio of 14.15, based on the last twelve months. In other words, at today's prices, investors are paying ₹14.15 for every ₹1 in prior year profit.

View our latest analysis for Mahindra Lifespace Developers

How Do I Calculate Mahindra Lifespace Developers's Price To Earnings Ratio?

The formula for P/E is:

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

Or for Mahindra Lifespace Developers:

P/E of 14.15 = ₹375.4 ÷ ₹26.53 (Based on the trailing twelve months to December 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each ₹1 of company 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

P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

It's nice to see that Mahindra Lifespace Developers grew EPS by a stonking 71% in the last year. In contrast, EPS has decreased by 20%, annually, over 5 years.

How Does Mahindra Lifespace Developers'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 Mahindra Lifespace Developers has a lower P/E than the average (16.3) P/E for companies in the real estate industry.

This suggests that market participants think Mahindra Lifespace Developers will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

Remember: P/E Ratios Don't Consider The Balance Sheet

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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).

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.

How Does Mahindra Lifespace Developers's Debt Impact Its P/E Ratio?

Mahindra Lifespace Developers has net cash of ₹1.4b. 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 Mahindra Lifespace Developers's P/E Ratio

Mahindra Lifespace Developers has a P/E of 14.1. That's below the average in the IN market, which is 15.4. It grew its EPS nicely over the last year, and the healthy balance sheet implies there is more potential for growth. The below average P/E ratio suggests that market participants don't believe the strong growth will continue.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 freereport on the analyst consensus forecasts could help you make a master move on this stock.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this freelist of companies with modest (or no) debt, trading on a P/E below 20.

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.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.