This forest and audeliaarticle is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Transwarranty Finance Limited’s (
NSE:TFL
) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months,
Transwarranty Finance’s P/E ratio is 20.77
. That is equivalent to an earnings yield of about 4.8%.
See our latest analysis for Transwarranty Finance
How Do I Calculate A Price To Earnings Ratio?
The
formula for price to earnings
is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Transwarranty Finance:
P/E of 20.77 = ₹4.7 ÷ ₹0.23 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying
a higher price
for each ₹1 of company 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Transwarranty Finance’s earnings per share fell by 6.2% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 62%.
How Does Transwarranty Finance’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Transwarranty Finance has a higher P/E than the average company (15.2) in the diversified financial industry.
NSEI:TFL PE PEG Gauge January 2nd 19
Transwarranty Finance’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor
director buying and selling
.
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Story continues
Is Debt Impacting Transwarranty Finance’s P/E?
Transwarranty Finance has net debt worth a very significant 153% of its market capitalization. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Bottom Line On Transwarranty Finance’s P/E Ratio
Transwarranty Finance trades on a P/E ratio of 20.8, which is above the IN market average of 17.2. With relatively high debt, and no earnings per share growth over twelve months, it’s safe to say the market believes the company will improve its earnings growth in the future.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don’t have analyst forecasts, but shareholders might want to examine
this detailed historical graph
of earnings, revenue and cash flow.
Of course,
you might find a fantastic investment by looking at a few good candidates.
So take a peek at this
free
list of companies with modest (or no) debt, trading on a P/E below 20.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at
.
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