In This Article:
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 Cambridge Technology Enterprises Limited's (NSE:CTE) P/E ratio to inform your assessment of the investment opportunity. Cambridge Technology Enterprises has a P/E ratio of 2.84, based on the last twelve months. That is equivalent to an earnings yield of about 35%.
Check out our latest analysis for Cambridge Technology Enterprises
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Cambridge Technology Enterprises:
P/E of 2.84 = ₹27.3 ÷ ₹9.6 (Based on the trailing twelve months to March 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 a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
Does Cambridge Technology Enterprises 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. We can see in the image below that the average P/E (12.1) for companies in the it industry is higher than Cambridge Technology Enterprises's P/E.
Cambridge Technology Enterprises's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
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. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
It's nice to see that Cambridge Technology Enterprises grew EPS by a stonking 46% in the last year. And it has bolstered its earnings per share by 76% per year over the last five years. I'd therefore be a little surprised if its P/E ratio was not relatively high.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.