Here's What First Resources Limited's (SGX:EB5) P/E Is Telling Us

Simply Wall St

Sat, Jun 15, 2019, 7:21 PM

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how First Resources Limited's (SGX:EB5) P/E ratio could help you assess the value on offer. What is First Resources's P/E ratio? Well, based on the last twelve months it is 17.91. That means that at current prices, buyers pay SGD17.91 for every SGD1 in trailing yearly profits.

See our latest analysis for First Resources

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

Or for First Resources:

P/E of 17.91 = $1.18 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.066 (Based on the trailing twelve months to March 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each SGD1 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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

First Resources's earnings per share fell by 11% in the last twelve months. But it has grown its earnings per share by 11% per year over the last three years. And over the longer term (5 years) earnings per share have decreased 14% annually. This growth rate might warrant a below average P/E ratio.

How Does First Resources's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that First Resources has a higher P/E than the average (16) P/E for companies in the food industry.

SGX:EB5 Price Estimation Relative to Market, June 16th 2019

That means that the market expects First Resources will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.