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 look at Skellerup Holdings Limited's (NZSE:SKL) P/E ratio and reflect on what it tells us about the company's share price. Skellerup Holdings has a P/E ratio of 15.51, based on the last twelve months. In other words, at today's prices, investors are paying NZ$15.51 for every NZ$1 in prior year profit.
View our latest analysis for Skellerup Holdings
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 Skellerup Holdings:
P/E of 15.51 = NZ$2.32 ÷ NZ$0.15 (Based on the trailing twelve months to June 2019.)
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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does Skellerup Holdings Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Skellerup Holdings has a P/E ratio that is roughly in line with the machinery industry average (15.2).
That indicates that the market expects Skellerup Holdings will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
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 unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Skellerup Holdings saw earnings per share improve by -5.7% last year. And it has improved its earnings per share by 12% per year over the last three years. Unfortunately, earnings per share are down 6.8% a year, over 5 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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 investing in growth. That means taking on debt (or spending its cash).