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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how RBL Bank Limited's (NSE:RBLBANK) P/E ratio could help you assess the value on offer. RBL Bank has a P/E ratio of 33.06, based on the last twelve months. That means that at current prices, buyers pay ₹33.06 for every ₹1 in trailing yearly profits.
Check out our latest analysis for RBL Bank
How Do I Calculate RBL Bank's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for RBL Bank:
P/E of 33.06 = ₹669.55 ÷ ₹20.25 (Based on the year to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
Notably, RBL Bank grew EPS by a whopping 29% in the last year. And its annual EPS growth rate over 5 years is 41%. With that performance, I would expect it to have an above average P/E ratio.
Does RBL Bank 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. As you can see below, RBL Bank has a higher P/E than the average company (30.4) in the banks industry.
Its relatively high P/E ratio indicates that RBL Bank shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.