Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use CRISIL Limited's (NSE:CRISIL) P/E ratio to inform your assessment of the investment opportunity. CRISIL has a price to earnings ratio of 30.14, based on the last twelve months. That means that at current prices, buyers pay ₹30.14 for every ₹1 in trailing yearly profits.

See our latest analysis for CRISIL

How Do You Calculate CRISIL's P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for CRISIL:

P/E of 30.14 = ₹1496.45 ÷ ₹49.65 (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 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

P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Most would be impressed by CRISIL earnings growth of 13% in the last year. And it has bolstered its earnings per share by 2.0% per year over the last five years. With that performance, you might expect an above average P/E ratio.

Does CRISIL 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. You can see in the image below that the average P/E (14.6) for companies in the capital markets industry is lower than CRISIL's P/E.

CRISIL's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.