In This Article:
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 Banyan Tree Holdings Limited’s (SGX:B58) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Banyan Tree Holdings’s P/E ratio is 35.25. That corresponds to an earnings yield of approximately 2.8%.
Check out our latest analysis for Banyan Tree Holdings
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 Banyan Tree Holdings:
P/E of 35.25 = SGD0.56 ÷ SGD0.016 (Based on the trailing twelve months to December 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 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Banyan Tree Holdings’s earnings per share fell by 4.2% in the last twelve months. But it has grown its earnings per share by 17% per year over the last five years.
How Does Banyan Tree Holdings’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 (18.6) for companies in the hospitality industry is lower than Banyan Tree Holdings’s P/E.
Its relatively high P/E ratio indicates that Banyan Tree Holdings shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. 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 taking on debt (or spending its remaining cash).