In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Can Fin Homes Limited’s (NSE:CANFINHOME) P/E ratio could help you assess the value on offer. Can Fin Homes has a price to earnings ratio of 13.09, based on the last twelve months. That is equivalent to an earnings yield of about 7.6%.
Check out our latest analysis for Can Fin Homes
How Do You Calculate Can Fin Homes’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Can Fin Homes:
P/E of 13.09 = ₹321.4 ÷ ₹24.56 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Can Fin Homes’s earnings per share grew by -10.0% in the last twelve months. And earnings per share have improved by 28% annually, over the last five years.
How Does Can Fin Homes’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Can Fin Homes has a lower P/E than the average (14.3) P/E for companies in the mortgage industry.
Its relatively low P/E ratio indicates that Can Fin Homes shareholders think it will struggle to do as well as other companies in its industry classification. 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.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.