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Is Motilal Oswal Financial Services Limited's (NSE:MOTILALOFS) High P/E Ratio A Problem For Investors?

Simply Wall St

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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 show how you can use Motilal Oswal Financial Services Limited's (NSE:MOTILALOFS) P/E ratio to inform your assessment of the investment opportunity. Motilal Oswal Financial Services has a price to earnings ratio of 30.91, based on the last twelve months. That is equivalent to an earnings yield of about 3.2%.

Check out our latest analysis for Motilal Oswal Financial Services

How Do You Calculate Motilal Oswal Financial Services's P/E Ratio?

The formula for P/E is:

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

Or for Motilal Oswal Financial Services:

P/E of 30.91 = ₹624.75 ÷ ₹20.21 (Based on the year to March 2019.)

Is A High P/E 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 Does Motilal Oswal Financial Services's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (15.6) for companies in the capital markets industry is lower than Motilal Oswal Financial Services's P/E.

NSEI:MOTILALOFS Price Estimation Relative to Market, July 19th 2019

Motilal Oswal Financial Services's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Motilal Oswal Financial Services saw earnings per share decrease by 53% last year. But EPS is up 48% over the last 5 years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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.

So What Does Motilal Oswal Financial Services's Balance Sheet Tell Us?

Net debt totals 23% of Motilal Oswal Financial Services's market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.

The Bottom Line On Motilal Oswal Financial Services's P/E Ratio

Motilal Oswal Financial Services's P/E is 30.9 which is above average (14.6) in its market. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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.

Of course you might be able to find a better stock than Motilal Oswal Financial Services. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.