In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Ban Leong Technologies Limited’s (SGX:B26) P/E ratio and reflect on what it tells us about the company’s share price. Ban Leong Technologies has a P/E ratio of 5.42, based on the last twelve months. That means that at current prices, buyers pay SGD5.42 for every SGD1 in trailing yearly profits.
View our latest analysis for Ban Leong Technologies
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Ban Leong Technologies:
P/E of 5.42 = SGD0.23 ÷ SGD0.043 (Based on the trailing twelve months to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each SGD1 the company has earned over the last year. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Notably, Ban Leong Technologies grew EPS by a whopping 39% in the last year. And its annual EPS growth rate over 5 years is 40%. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does Ban Leong Technologies’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (11.4) for companies in the electronic industry is higher than Ban Leong Technologies’s P/E.
Its relatively low P/E ratio indicates that Ban Leong Technologies shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Ban Leong Technologies, it’s quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
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. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).