Should We Worry About Anglo-Eastern Plantations Plc's (LON:AEP) P/E Ratio?

Simply Wall St

Tue, Jul 9, 2019, 11:50 PM

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 Anglo-Eastern Plantations Plc's (LON:AEP) P/E ratio to inform your assessment of the investment opportunity. Anglo-Eastern Plantations has a P/E ratio of 20.34, based on the last twelve months. That corresponds to an earnings yield of approximately 4.9%.

View our latest analysis for Anglo-Eastern Plantations

How Do I Calculate A Price To Earnings 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 Anglo-Eastern Plantations:

P/E of 20.34 = $5.86 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.29 (Based on the year to December 2018.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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 Does Anglo-Eastern Plantations's P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (19.2) for companies in the food industry is roughly the same as Anglo-Eastern Plantations's P/E.

LSE:AEP Price Estimation Relative to Market, July 10th 2019

That indicates that the market expects Anglo-Eastern Plantations will perform roughly in line with other companies in its industry. So if Anglo-Eastern Plantations actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Anglo-Eastern Plantations's earnings per share fell by 68% in the last twelve months. But it has grown its earnings per share by 5.3% per year over the last three years. And EPS is down 34% a year, over the last 5 years. This might lead to muted expectations.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

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. 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.

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 Anglo-Eastern Plantations's Debt Impact Its P/E Ratio?

With net cash of US$93m, Anglo-Eastern Plantations has a very strong balance sheet, which may be important for its business. Having said that, at 40% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On Anglo-Eastern Plantations's P/E Ratio

Anglo-Eastern Plantations has a P/E of 20.3. That's higher than the average in its market, which is 16.2. The recent drop in earnings per share would make some investors cautious, but the healthy balance sheet means the company retains potential for future growth. If fails to eventuate, the current high P/E could prove to be temporary, as the share price falls.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' Although we don't have analyst forecasts, you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Anglo-Eastern Plantations. So you may wish to see this free collection of other companies that have grown earnings strongly.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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