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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how Accelya Solutions India Limited's (NSE:ACCELYA) P/E ratio could help you assess the value on offer. What is Accelya Solutions India's P/E ratio? Well, based on the last twelve months it is 12.78. That corresponds to an earnings yield of approximately 7.8%.
See our latest analysis for Accelya Solutions India
How Do I Calculate Accelya Solutions India's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Accelya Solutions India:
P/E of 12.78 = ₹872.7 ÷ ₹68.27 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each ₹1 the company has earned over the last year. 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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
Most would be impressed by Accelya Solutions India earnings growth of 25% in the last year. And it has bolstered its earnings per share by 3.3% per year over the last five years. This could arguably justify a relatively high P/E ratio.
Does Accelya Solutions India Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Accelya Solutions India has a P/E ratio that is roughly in line with the it industry average (12.8).
Accelya Solutions India's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Accelya Solutions India actually outperforms its peers going forward, that should be a positive for the share price. I inform my view byby checking management tenure and remuneration, among other things.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.