This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Advanced Share Registry Limited’s (ASX:ASW) P/E ratio to inform your assessment of the investment opportunity. Advanced Share Registry has a price to earnings ratio of 12.32, based on the last twelve months. That means that at current prices, buyers pay A$12.32 for every A$1 in trailing yearly profits.
See our latest analysis for Advanced Share Registry
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Advanced Share Registry:
P/E of 12.32 = A$0.66 ÷ A$0.054 (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 A$1 of company earnings. 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
P/E ratios primarily reflect market expectations around earnings growth rates. 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Most would be impressed by Advanced Share Registry earnings growth of 11% in the last year. And it has bolstered its earnings per share by 7.2% per year over the last five years. So one might expect an above average P/E ratio.
How Does Advanced Share Registry’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Advanced Share Registry has a lower P/E than the average (13.6) in the capital markets industry classification.
Its relatively low P/E ratio indicates that Advanced Share Registry shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.