In This Article:
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 Koh Brothers Group Limited's (SGX:K75) P/E ratio to inform your assessment of the investment opportunity. Koh Brothers Group has a price to earnings ratio of 14.97, based on the last twelve months. In other words, at today's prices, investors are paying SGD14.97 for every SGD1 in prior year profit.
View our latest analysis for Koh Brothers Group
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 Koh Brothers Group:
P/E of 14.97 = SGD0.24 ÷ SGD0.016 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Koh Brothers Group shrunk earnings per share by 68% over the last year. And EPS is down 19% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.
Does Koh Brothers Group Have A Relatively High Or Low P/E For Its Industry?
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 (11.2) for companies in the construction industry is lower than Koh Brothers Group's P/E.
Its relatively high P/E ratio indicates that Koh Brothers Group shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).