Does Lakshmi Finance & Industrial Corporation Limited (NSE:LFIC) Have A Good P/E Ratio?

Cole Patterson

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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 Lakshmi Finance & Industrial Corporation Limited’s (NSE:LFIC) P/E ratio could help you assess the value on offer. Lakshmi Finance & Industrial has a price to earnings ratio of 11.06, based on the last twelve months. In other words, at today’s prices, investors are paying ₹11.06 for every ₹1 in prior year profit.

See our latest analysis for Lakshmi Finance & Industrial

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Lakshmi Finance & Industrial:

P/E of 11.06 = ₹85.85 ÷ ₹7.76 (Based on the trailing twelve months to December 2018.)

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. 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

When earnings fall, the ‘E’ decreases, over time. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.

Lakshmi Finance & Industrial’s earnings per share fell by 48% in the last twelve months. But EPS is up 2.7% over the last 5 years.

How Does Lakshmi Finance & Industrial’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Lakshmi Finance & Industrial has a lower P/E than the average (13.7) P/E for companies in the capital markets industry.

NSEI:LFIC PE PEG Gauge February 20th 19
NSEI:LFIC PE PEG Gauge February 20th 19

This suggests that market participants think Lakshmi Finance & Industrial will underperform other companies in its industry. Since the market seems unimpressed with Lakshmi Finance & Industrial, it’s quite possible it could surprise on the upside. You 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

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.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

Is Debt Impacting Lakshmi Finance & Industrial’s P/E?

Since Lakshmi Finance & Industrial holds net cash of ₹60m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On Lakshmi Finance & Industrial’s P/E Ratio

Lakshmi Finance & Industrial’s P/E is 11.1 which is below average (15.2) in the IN market. The recent drop in earnings per share would make investors cautious, the healthy balance sheet means the company retains potential for future growth. If that occurs, the current low P/E could prove to be temporary.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. Although we don’t have analyst forecasts, you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than Lakshmi Finance & Industrial. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.