In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use NCC Limited's (NSE:NCC) P/E ratio to inform your assessment of the investment opportunity. What is NCC's P/E ratio? Well, based on the last twelve months it is 14.07. That means that at current prices, buyers pay ₹14.07 for every ₹1 in trailing yearly profits.
Check out our latest analysis for NCC
How Do You Calculate NCC's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for NCC:
P/E of 14.07 = ₹102.8 ÷ ₹7.3 (Based on the trailing twelve months to December 2018.)
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 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
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
In the last year, NCC grew EPS like Taylor Swift grew her fan base back in 2010; the 205% gain was both fast and well deserved. The cherry on top is that the five year growth rate was an impressive 72% per year. So I'd be surprised if the P/E ratio was not above average.
Does NCC Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that NCC has a P/E ratio that is roughly in line with the construction industry average (15).
NCC'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. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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).