In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at eClerx Services Limited’s (NSE:ECLERX) P/E ratio and reflect on what it tells us about the company’s share price. eClerx Services has a P/E ratio of 16.46, based on the last twelve months. In other words, at today’s prices, investors are paying ₹16.46 for every ₹1 in prior year profit.
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How Do I Calculate eClerx Services’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for eClerx Services:
P/E of 16.46 = ₹1069.55 ÷ ₹64.99 (Based on the trailing twelve months to September 2018.)
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
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
eClerx Services’s earnings per share fell by 21% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 6.4%. And over the longer term (3 years) earnings per share have decreased 5.5% annually. This could justify a low P/E.
How Does eClerx Services’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (16) for companies in the it industry is roughly the same as eClerx Services’s P/E.
That indicates that the market expects eClerx Services will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. 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.