Don’t Sell Multi Commodity Exchange of India Limited (NSE:MCX) Before You Read This

Source:- simplywall.st

How Do You Calculate Multi Commodity Exchange of India’s P/E Ratio?

The formula for price to earnings is:

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

Or for Multi Commodity Exchange of India:

P/E of 27.95 = ₹803.5 ÷ ₹28.75 (Based on the year to March 2019.)

Is A High Price-to-Earnings 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. 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. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Multi Commodity Exchange of India increased earnings per share by a whopping 35% last year. And it has improved its earnings per share by 8.4% per year over the last three years. With that performance, I would expect it to have an above average P/E ratio.

How Does Multi Commodity Exchange of India’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Multi Commodity Exchange of India has a higher P/E than the average company (16) in the capital markets industry.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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.

So What Does Multi Commodity Exchange of India’s Balance Sheet Tell Us?

Multi Commodity Exchange of India has net cash of ₹11b. This is fairly high at 27% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Verdict On Multi Commodity Exchange of India’s P/E Ratio

Multi Commodity Exchange of India has a P/E of 27.9. That’s higher than the average in the IN market, which is 16. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we’d expect Multi Commodity Exchange of India to have a high P/E ratio.