In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Chuan Hup Holdings Limited’s (SGX:C33) P/E ratio to inform your assessment of the investment opportunity. Chuan Hup Holdings has a P/E ratio of 17.2, based on the last twelve months. That is equivalent to an earnings yield of about 5.8%.
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How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Chuan Hup Holdings:
P/E of 17.2 = $0.24 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.014 (Based on the year to September 2018.)
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 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
If earnings fall then in the future the ‘E’ will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
Chuan Hup Holdings shrunk earnings per share by 35% over the last year. And EPS is down 5.3% a year, over the last 5 years. This might lead to muted expectations.
How Does Chuan Hup Holdings’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Chuan Hup Holdings has a higher P/E than the average (11.3) P/E for companies in the electronic industry.
Its relatively high P/E ratio indicates that Chuan Hup 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.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.