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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 Sasken Technologies Limited’s (NSE:SASKEN) P/E ratio to inform your assessment of the investment opportunity. Sasken Technologies has a price to earnings ratio of 13.16, based on the last twelve months. That is equivalent to an earnings yield of about 7.6%.

### How Do You Calculate Sasken Technologies’s P/E Ratio?

The formula for P/E is:

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

P/E of 13.16 = ₹702 ÷ ₹53.33 (Based on the trailing twelve months to September 2018.)

### Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each ₹1 the company has earned over the last year. 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.’

### How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.

It’s great to see that Sasken Technologies grew EPS by 19% in the last year. And it has bolstered its earnings per share by 12% per year over the last five years. This could arguably justify a relatively high P/E ratio. In contrast, EPS has decreased by 8.9%, annually, over 3 years.

### How Does Sasken Technologies’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Sasken Technologies has a lower P/E than the average (16.4) in the software industry classification.

Its relatively low P/E ratio indicates that Sasken Technologies shareholders think it will struggle to do as well as other companies in its industry classification. 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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

The extra options and safety that comes with Sasken Technologies’s ₹566m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

### The Bottom Line On Sasken Technologies’s P/E Ratio

Sasken Technologies has a P/E of 13.2. That’s below the average in the IN market, which is 16.8. It grew its EPS nicely over the last year, and the healthy balance sheet implies there is more potential for growth. The relatively low P/E ratio implies the market is pessimistic. Given analysts are expecting further growth, one I would have expected a higher P/E ratio. So this stock may well be worth further research.

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 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 find a fantastic investment by looking at a few good candidates. So take a peek at this free list 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.