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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how APAC Realty Limited's (SGX:CLN) P/E ratio could help you assess the value on offer. Based on the last twelve months, APAC Realty's P/E ratio is 9.54. That corresponds to an earnings yield of approximately 10%.
Check out our latest analysis for APAC Realty
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 APAC Realty:
P/E of 9.54 = SGD0.54 ÷ SGD0.057 (Based on the year to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each SGD1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does APAC Realty's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below APAC Realty has a P/E ratio that is fairly close for the average for the real estate industry, which is 9.5.
That indicates that the market expects APAC Realty 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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
APAC Realty saw earnings per share decrease by 32% last year. But it has grown its earnings per share by 7.5% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.