What Does MAS Financial Services Limited's (NSE:MASFIN) P/E Ratio Tell You?

Simply Wall St

Mon, Jun 24, 2019, 2:05 AM

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use MAS Financial Services Limited's (NSE:MASFIN) P/E ratio to inform your assessment of the investment opportunity. MAS Financial Services has a price to earnings ratio of 21.36, based on the last twelve months. That is equivalent to an earnings yield of about 4.7%.

See our latest analysis for MAS Financial Services

How Do You Calculate MAS Financial Services's P/E Ratio?

The formula for price to earnings is:

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

Or for MAS Financial Services:

P/E of 21.36 = ₹600.05 ÷ ₹28.09 (Based on the year to March 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each ₹1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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.

It's nice to see that MAS Financial Services grew EPS by a stonking 33% in the last year. And its annual EPS growth rate over 5 years is 31%. So we'd generally expect it to have a relatively high P/E ratio.

Does MAS Financial Services 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 MAS Financial Services has a P/E ratio that is roughly in line with the consumer finance industry average (20.9).

NSEI:MASFIN Price Estimation Relative to Market, June 24th 2019

MAS Financial Services's P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. I inform my view byby checking management tenure and remuneration, among other things.

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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.