This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Shriram City Union Finance Limited's (NSE:SHRIRAMCIT) P/E ratio to inform your assessment of the investment opportunity. Shriram City Union Finance has a price to earnings ratio of 8.12, based on the last twelve months. That corresponds to an earnings yield of approximately 12.3%.
View our latest analysis for Shriram City Union Finance
How Do I Calculate Shriram City Union Finance's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Shriram City Union Finance:
P/E of 8.12 = ₹1322.20 ÷ ₹162.76 (Based on the year to September 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 isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
Does Shriram City Union Finance Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (14.9) for companies in the consumer finance industry is higher than Shriram City Union Finance's P/E.
This suggests that market participants think Shriram City Union Finance will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
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. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
It's great to see that Shriram City Union Finance grew EPS by 23% in the last year. And its annual EPS growth rate over 5 years is 13%. So one might expect an above average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.