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 DBS Group Holdings Ltd’s (SGX:D05) P/E ratio and reflect on what it tells us about the company’s share price. DBS Group Holdings has a price to earnings ratio of 11.39, based on the last twelve months. In other words, at today’s prices, investors are paying SGD11.39 for every SGD1 in prior year profit.
See our latest analysis for DBS Group Holdings
How Do I Calculate DBS Group Holdings’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for DBS Group Holdings:
P/E of 11.39 = SGD23.91 ÷ SGD2.1 (Based on the trailing twelve months 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. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
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. Earnings growth means that in the future the ‘E’ will be higher. 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.
It’s nice to see that DBS Group Holdings grew EPS by a stonking 32% in the last year. And earnings per share have improved by 2.9% annually, over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does DBS Group 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 DBS Group Holdings has a higher P/E than the average (9.1) P/E for companies in the banks industry.
Its relatively high P/E ratio indicates that DBS Group 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. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.