In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how PNB Housing Finance Limited’s (NSE:PNBHOUSING) P/E ratio could help you assess the value on offer. PNB Housing Finance has a P/E ratio of 16.32, based on the last twelve months. That is equivalent to an earnings yield of about 6.1%.
Check out our latest analysis for PNB Housing Finance
How Do You Calculate PNB Housing Finance’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for PNB Housing Finance:
P/E of 16.32 = ₹956 ÷ ₹58.59 (Based on the year to September 2018.)
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 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. 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.
It’s nice to see that PNB Housing Finance grew EPS by a stonking 39% in the last year. And earnings per share have improved by 26% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.
How Does PNB Housing Finance’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 PNB Housing Finance has a lower P/E than the average (17.8) P/E for companies in the mortgage industry.
PNB Housing Finance’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with PNB Housing Finance, it’s quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.