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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 HDFC Standard Life Insurance Company Limited’s (NSE:HDFCLIFE) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, HDFC Standard Life Insurance’s P/E ratio is 70.35. That is equivalent to an earnings yield of about 1.4%.
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How Do You Calculate HDFC Standard Life Insurance’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for HDFC Standard Life Insurance:
P/E of 70.35 = ₹388.55 ÷ ₹5.52 (Based on the trailing twelve months to September 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the ‘E’ will be higher. 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.
It’s great to see that HDFC Standard Life Insurance grew EPS by 24% in the last year. And earnings per share have improved by 11% annually, over the last five years. With that performance, you might expect an above average P/E ratio.
How Does HDFC Standard Life Insurance’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (34.7) for companies in the insurance industry is lower than HDFC Standard Life Insurance’s P/E.
HDFC Standard Life Insurance’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.