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Is Central Depository Services (India) Limited's (NSE:CDSL) High P/E Ratio A Problem For Investors?

Simply Wall St

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Central Depository Services (India) Limited's (NSE:CDSL) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Central Depository Services (India) has a P/E ratio of 20.49. That is equivalent to an earnings yield of about 4.9%.

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Check out our latest analysis for Central Depository Services (India)

How Do You Calculate Central Depository Services (India)'s P/E Ratio?

The formula for P/E is:

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

Or for Central Depository Services (India):

P/E of 20.49 = ₹222.5 ÷ ₹10.86 (Based on the year to March 2019.)

Is A High P/E 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. 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. 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.

Central Depository Services (India) increased earnings per share by 10.0% last year. And earnings per share have improved by 18% annually, over the last five years.

Does Central Depository Services (India) Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, Central Depository Services (India) has a higher P/E than the average company (15.2) in the capital markets industry.

NSEI:CDSL Price Estimation Relative to Market, May 23rd 2019

That means that the market expects Central Depository Services (India) will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. 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. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

Central Depository Services (India)'s Balance Sheet

Since Central Depository Services (India) holds net cash of ₹1.8b, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On Central Depository Services (India)'s P/E Ratio

Central Depository Services (India)'s P/E is 20.5 which is above average (15.4) in the IN market. EPS was up modestly better over the last twelve months. Also positive, the relatively strong balance sheet will allow for investment in growth -- and the P/E indicates shareholders that will happen!

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. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Central Depository Services (India) may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.