The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at WNS (Holdings) Limited's (NYSE:WNS) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, WNS (Holdings)'s P/E ratio is 29.91. That corresponds to an earnings yield of approximately 3.3%.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for WNS (Holdings):
P/E of 29.91 = USD68.71 ÷ USD2.30 (Based on the trailing twelve months to September 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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'.
Does WNS (Holdings) Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that WNS (Holdings) has a P/E ratio that is roughly in line with the it industry average (32.1).
WNS (Holdings)'s P/E tells us that market participants think its prospects are roughly in line with its industry. So if WNS (Holdings) actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
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. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
It's great to see that WNS (Holdings) grew EPS by 18% in the last year. And its annual EPS growth rate over 5 years is 17%. So one might expect an above average P/E ratio.
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 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.
WNS (Holdings)'s Balance Sheet
The extra options and safety that comes with WNS (Holdings)'s US$93m 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 WNS (Holdings)'s P/E Ratio
WNS (Holdings) trades on a P/E ratio of 29.9, which is above its market average of 18.9. Its net cash position supports a higher P/E ratio, as does its solid recent earnings growth. Therefore it seems reasonable that the market would have relatively high expectations of the company
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than WNS (Holdings). So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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