This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at IIFL Securities Limited's (NSE:IIFLSEC) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, IIFL Securities's P/E ratio is 5.47. That corresponds to an earnings yield of approximately 18.3%.
See our latest analysis for IIFL Securities
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for IIFL Securities:
P/E of 5.47 = ₹29.40 ÷ ₹5.37 (Based on the year to March 2019.)
Is A High Price-to-Earnings 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 Does IIFL Securities's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (14.7) for companies in the capital markets industry is higher than IIFL Securities's P/E.
This suggests that market participants think IIFL Securities 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. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
IIFL Securities saw earnings per share decrease by 5.3% last year. And it has shrunk its earnings per share by 1.1% per year over the last five years. So you wouldn't expect a very high P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. 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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.