What Does Aditya Birla Money Limited's (NSE:BIRLAMONEY) P/E Ratio Tell You?

Simply Wall St

Wed, Jun 12, 2019, 12:22 AM

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Aditya Birla Money Limited's (NSE:BIRLAMONEY) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Aditya Birla Money's P/E ratio is 26.72. That is equivalent to an earnings yield of about 3.7%.

See our latest analysis for Aditya Birla Money

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Aditya Birla Money:

P/E of 26.72 = ₹47.45 ÷ ₹1.78 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

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

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. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Aditya Birla Money increased earnings per share by a whopping 36% last year. And earnings per share have improved by 44% annually, over the last three years. So we'd generally expect it to have a relatively high P/E ratio.

Does Aditya Birla Money Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Aditya Birla Money has a higher P/E than the average (16) P/E for companies in the capital markets industry.

NSEI:BIRLAMONEY Price Estimation Relative to Market, June 12th 2019

Aditya Birla Money'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 investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).