Is InfoBeans Technologies Limited’s (NSE:INFOBEAN) P/E Ratio Really That Good?
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use InfoBeans Technologies Limited’s (NSE:INFOBEAN) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, InfoBeans Technologies’s P/E ratio is 8.36. That corresponds to an earnings yield of approximately 12%.
See our latest analysis for InfoBeans Technologies
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for InfoBeans Technologies:
P/E of 8.36 = ₹70 ÷ ₹8.38 (Based on the year 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 isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the ‘E’ will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Most would be impressed by InfoBeans Technologies earnings growth of 19% in the last year. And it has bolstered its earnings per share by 15% per year over the last five years. With that performance, you might expect an above average P/E ratio.
How Does InfoBeans Technologies’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 InfoBeans Technologies has a lower P/E than the average (15.6) P/E for companies in the software industry.
This suggests that market participants think InfoBeans Technologies will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and 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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
InfoBeans Technologies’s Balance Sheet
The extra options and safety that comes with InfoBeans Technologies’s ₹369m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On InfoBeans Technologies’s P/E Ratio
InfoBeans Technologies’s P/E is 8.4 which is below average (16.3) in the IN market. Not only should the net cash position reduce risk, but the recent growth has been impressive. The below average P/E ratio suggests that market participants don’t believe the strong growth will continue.
Investors have an opportunity when market expectations about a stock are wrong. 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.
Of course you might be able to find a better stock than InfoBeans Technologies. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 editorial-team@simplywallst.com.
