Here's What Himachal Futuristic Communications Limited's (NSE:HFCL) P/E Ratio Is Telling Us

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Himachal Futuristic Communications Limited's (NSE:HFCL), to help you decide if the stock is worth further research. Himachal Futuristic Communications has a price to earnings ratio of 8.28, based on the last twelve months. That is equivalent to an earnings yield of about 12.1%.

Check out our latest analysis for Himachal Futuristic Communications

How Do You Calculate Himachal Futuristic Communications's P/E Ratio?

The formula for P/E is:

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

Or for Himachal Futuristic Communications:

P/E of 8.28 = ₹18.80 ÷ ₹2.27 (Based on the trailing twelve months to June 2019.)

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.

Does Himachal Futuristic Communications Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. The image below shows that Himachal Futuristic Communications has a lower P/E than the average (17.3) P/E for companies in the telecom industry.

This suggests that market participants think Himachal Futuristic Communications will underperform other companies in its industry.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Himachal Futuristic Communications's earnings made like a rocket, taking off 56% last year. Having said that, if we look back three years, EPS growth has averaged a comparatively less impressive 1.9%. Regrettably, the longer term performance is poor, with EPS down 9.7% per year over 5 years. So if Himachal Futuristic Communications grows EPS going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

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. 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.

How Does Himachal Futuristic Communications's Debt Impact Its P/E Ratio?

Net debt totals 16% of Himachal Futuristic Communications's market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.

The Verdict On Himachal Futuristic Communications's P/E Ratio

Himachal Futuristic Communications trades on a P/E ratio of 8.3, which is below the IN market average of 13.9. The company hasn't stretched its balance sheet, and earnings growth was good last year. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than Himachal Futuristic Communications. 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).

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.

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. Thank you for reading.