In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use AU Small Finance Bank Limited's (NSE:AUBANK) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, AU Small Finance Bank has a P/E ratio of 38.55. That means that at current prices, buyers pay ₹38.55 for every ₹1 in trailing yearly profits.
Check out our latest analysis for AU Small Finance Bank
How Do I Calculate AU Small Finance Bank's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for AU Small Finance Bank:
P/E of 38.55 = ₹654.30 ÷ ₹16.97 (Based on the year to June 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 AU Small Finance 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. You can see in the image below that the average P/E (20.1) for companies in the banks industry is lower than AU Small Finance Bank's P/E.
AU Small Finance Bank's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
In the last year, AU Small Finance Bank grew EPS like Taylor Swift grew her fan base back in 2010; the 58% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 33% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. 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.