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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Karin Technology Holdings Limited's (SGX:K29) P/E ratio and reflect on what it tells us about the company's share price. Karin Technology Holdings has a P/E ratio of 12.20, based on the last twelve months. That means that at current prices, buyers pay SGD12.20 for every SGD1 in trailing yearly profits.
View our latest analysis for Karin Technology Holdings
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Karin Technology Holdings:
P/E of 12.20 = SGD1.84 (Note: this is the share price in the reporting currency, namely, HKD ) ÷ SGD0.15 (Based on the trailing twelve months to June 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 Karin Technology Holdings's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Karin Technology Holdings has a P/E ratio that is roughly in line with the electronic industry average (12.2).
Karin Technology Holdings's P/E tells us that market participants think its prospects are roughly in line with 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. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Most would be impressed by Karin Technology Holdings earnings growth of 15% in the last year. And it has improved its earnings per share by 33% per year over the last three years. This could arguably justify a relatively high P/E ratio. Unfortunately, earnings per share are down 3.1% a year, over 5 years.
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. So it won't reflect the advantage of cash, or disadvantage of debt. 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.