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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Mahindra Lifespace Developers Limited's (NSE:MAHLIFE) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Mahindra Lifespace Developers's P/E ratio is 16.32. In other words, at today's prices, investors are paying ₹16.32 for every ₹1 in prior year profit.
Check out our latest analysis for Mahindra Lifespace Developers
How Do You Calculate Mahindra Lifespace Developers's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Mahindra Lifespace Developers:
P/E of 16.32 = ₹380.65 ÷ ₹23.32 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. When earnings grow, the 'E' increases, over time. 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.
Mahindra Lifespace Developers increased earnings per share by an impressive 17% over the last twelve months. And earnings per share have improved by 1.4% annually, over the last three years. With that performance, you might expect an above average P/E ratio. But earnings per share are down 1.1% per year over the last five years.
How Does Mahindra Lifespace Developers'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 Mahindra Lifespace Developers has a P/E ratio that is roughly in line with the real estate industry average (16.4).
That indicates that the market expects Mahindra Lifespace Developers will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
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. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).