In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Coral India Finance and Housing Limited’s (NSE:CORALFINAC) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Coral India Finance and Housing’s P/E ratio is 6.36. That corresponds to an earnings yield of approximately 16%.
Check out our latest analysis for Coral India Finance and Housing
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Coral India Finance and Housing:
P/E of 6.36 = ₹15.35 ÷ ₹2.41 (Based on the trailing twelve months to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each ₹1 of company earnings. 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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Coral India Finance and Housing increased earnings per share by a whopping 28% last year. And its annual EPS growth rate over 5 years is 5.7%. With that performance, I would expect it to have an above average P/E ratio.
How Does Coral India Finance and Housing’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Coral India Finance and Housing has a lower P/E than the average (15.3) P/E for companies in the construction industry.
This suggests that market participants think Coral India Finance and Housing will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or 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.