This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Lian Beng Group Ltd's (SGX:L03) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Lian Beng Group's P/E ratio is 5.23. That is equivalent to an earnings yield of about 19%.
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View our latest analysis for Lian Beng Group
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 Lian Beng Group:
P/E of 5.23 = SGD0.49 ÷ SGD0.094 (Based on the trailing twelve months to February 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 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. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Lian Beng Group saw earnings per share decrease by 19% last year. And EPS is down 12% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.
How Does Lian Beng Group'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 Lian Beng Group has a lower P/E than the average (11.2) P/E for companies in the construction industry.
Its relatively low P/E ratio indicates that Lian Beng Group shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
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. 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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.