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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Cigniti Technologies Limited's (NSE:CIGNITI) P/E ratio and reflect on what it tells us about the company's share price. Cigniti Technologies has a price to earnings ratio of 6.07, based on the last twelve months. That means that at current prices, buyers pay ₹6.07 for every ₹1 in trailing yearly profits.
See our latest analysis for Cigniti Technologies
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Cigniti Technologies:
P/E of 6.07 = ₹325.45 ÷ ₹53.62 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Cigniti Technologies's earnings made like a rocket, taking off 344% last year. The sweetener is that the annual five year growth rate of 34% is also impressive. So I'd be surprised if the P/E ratio was not above average.
Does Cigniti Technologies Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Cigniti Technologies has a lower P/E than the average (14.4) P/E for companies in the it industry.
Its relatively low P/E ratio indicates that Cigniti 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. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.