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 IndusInd Bank Limited's (NSE:INDUSINDBK) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, IndusInd Bank's P/E ratio is 19.78. In other words, at today's prices, investors are paying ₹19.78 for every ₹1 in prior year profit.
View our latest analysis for IndusInd Bank
How Do I Calculate IndusInd Bank's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for IndusInd Bank:
P/E of 19.78 = ₹1276.65 ÷ ₹64.53 (Based on the year to September 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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 Does IndusInd Bank'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. The image below shows that IndusInd Bank has a P/E ratio that is roughly in line with the banks industry average (20.1).
That indicates that the market expects IndusInd Bank will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
IndusInd Bank increased earnings per share by an impressive 12% over the last twelve months. And its annual EPS growth rate over 5 years is 16%. With that performance, you might expect an above average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. 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.