In This Article:
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 Riverstone Holdings Limited’s (SGX:AP4) P/E ratio to inform your assessment of the investment opportunity. Riverstone Holdings has a P/E ratio of 19.11, based on the last twelve months. That corresponds to an earnings yield of approximately 5.2%.
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How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Riverstone Holdings:
P/E of 19.11 = MYR3.33 (Note: this is the share price in the reporting currency, namely, MYR ) ÷ MYR0.17 (Based on the year to September 2018.)
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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about 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. When earnings grow, the ‘E’ increases, over time. 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.
Riverstone Holdings saw earnings per share decrease by 1.4% last year. But EPS is up 17% over the last 5 years.
How Does Riverstone Holdings’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Riverstone Holdings has a higher P/E than the average (17.7) P/E for companies in the medical equipment industry.
Its relatively high P/E ratio indicates that Riverstone Holdings 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
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.