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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how CITIC Envirotech Ltd.’s (SGX:CEE) P/E ratio could help you assess the value on offer. Based on the last twelve months, CITIC Envirotech’s P/E ratio is 8.49. In other words, at today’s prices, investors are paying SGD8.49 for every SGD1 in prior year profit.
See our latest analysis for CITIC Envirotech
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for CITIC Envirotech:
P/E of 8.49 = SGD0.48 ÷ SGD0.057 (Based on the year to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each SGD1 of company earnings. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
CITIC Envirotech had pretty flat EPS growth in the last year. But over the longer term (5 years) earnings per share have increased by 23%.
How Does CITIC Envirotech’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that CITIC Envirotech has a lower P/E than the average (16.8) P/E for companies in the commercial services industry.
Its relatively low P/E ratio indicates that CITIC Envirotech shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with CITIC Envirotech, 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.
Remember: P/E Ratios Don’t Consider The Balance Sheet
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.