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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Centrum Capital Limited's (NSE:CENTRUM) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Centrum Capital has a P/E ratio of 14.24. That means that at current prices, buyers pay ₹14.24 for every ₹1 in trailing yearly profits.
Check out our latest analysis for Centrum Capital
How Do You Calculate Centrum Capital's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Centrum Capital:
P/E of 14.24 = ₹25.15 ÷ ₹1.77 (Based on the year to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each ₹1 of company 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.
How Does Centrum Capital'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 Centrum Capital has a lower P/E than the average (16.1) P/E for companies in the capital markets industry.
Centrum Capital'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. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
In the last year, Centrum Capital grew EPS like Taylor Swift grew her fan base back in 2010; the 131% gain was both fast and well deserved. The cherry on top is that the five year growth rate was an impressive 24% per year. So I'd be surprised if the P/E ratio was not above average.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. 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.