Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how City Union Bank Ltd.'s (NSE:CUB) P/E ratio could help you assess the value on offer. Based on the last twelve months, City Union Bank's P/E ratio is 22.00. In other words, at today's prices, investors are paying ₹22.00 for every ₹1 in prior year profit.

View our latest analysis for City Union Bank

How Do I Calculate City Union Bank's Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for City Union Bank:

P/E of 22.00 = ₹212.90 ÷ ₹9.68 (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. 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.

Does City Union Bank 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. As you can see below City Union Bank has a P/E ratio that is fairly close for the average for the banks industry, which is 21.7.

Its P/E ratio suggests that City Union Bank shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. I would further inform my view by checking insider buying and selling., among other things.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Most would be impressed by City Union Bank earnings growth of 12% in the last year. And earnings per share have improved by 12% annually, over the last five years. With that performance, you might expect an above average P/E ratio.

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

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.