Here's What Univastu India Limited's (NSE:UNIVASTU) P/E Ratio Is Telling Us
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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Univastu India Limited's (NSE:UNIVASTU), to help you decide if the stock is worth further research. Univastu India has a P/E ratio of 10.05, based on the last twelve months. That corresponds to an earnings yield of approximately 10.0%.
View our latest analysis for Univastu India
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Univastu India:
P/E of 10.05 = ₹80 ÷ ₹7.96 (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
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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
It's great to see that Univastu India grew EPS by 25% in the last year. And its annual EPS growth rate over 3 years is 52%. With that performance, you might expect an above average P/E ratio. In contrast, EPS has decreased by 27%, annually, over 5 years.
How Does Univastu India's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Univastu India has a lower P/E than the average (14.9) P/E for companies in the construction industry.
Univastu India's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Univastu India, 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.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. 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.
How Does Univastu India's Debt Impact Its P/E Ratio?
Net debt is 49% of Univastu India's market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Bottom Line On Univastu India's P/E Ratio
Univastu India has a P/E of 10.1. That's below the average in the IN market, which is 15.3. The company does have a little debt, and EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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. 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.
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.
