This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Sylogist Ltd.’s (CVE:SYZ) P/E ratio to inform your assessment of the investment opportunity. Sylogist has a price to earnings ratio of 26.11, based on the last twelve months. That means that at current prices, buyers pay CA$26.11 for every CA$1 in trailing yearly profits.
View our latest analysis for Sylogist
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Sylogist:
P/E of 26.11 = CA$12.4 ÷ CA$0.47 (Based on the year to June 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each CA$1 of company earnings. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Sylogist increased earnings per share by a whopping 51% last year. And its annual EPS growth rate over 5 years is 20%. So we’d generally expect it to have a relatively high P/E ratio.
How Does Sylogist’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Sylogist has a higher P/E than the average company (20.4) in the it industry.
Sylogist’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. 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.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
How Does Sylogist’s Debt Impact Its P/E Ratio?
The extra options and safety that comes with Sylogist’s CA$30m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.