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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use WNS (Holdings) Limited's (NYSE:WNS) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, WNS (Holdings) has a P/E ratio of 28.15. That means that at current prices, buyers pay $28.15 for every $1 in trailing yearly profits.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for WNS (Holdings):
P/E of 28.15 = $59.2 ÷ $2.1 (Based on the trailing twelve months 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. 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
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
It's great to see that WNS (Holdings) grew EPS by 23% in the last year. And it has bolstered its earnings per share by 21% per year over the last five years. So one might expect an above average P/E ratio.
Does WNS (Holdings) Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see WNS (Holdings) has a lower P/E than the average (35.8) in the it industry classification.
This suggests that market participants think WNS (Holdings) will underperform other companies in its industry. Since the market seems unimpressed with WNS (Holdings), 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
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Is Debt Impacting WNS (Holdings)'s P/E?
Since WNS (Holdings) holds net cash of US$92m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On WNS (Holdings)'s P/E Ratio
WNS (Holdings) trades on a P/E ratio of 28.2, which is above the US market average of 18.1. With cash in the bank the company has plenty of growth options -- and it is already on the right track. Therefore it seems reasonable that the market would have relatively high expectations of the company
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
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 email@example.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.