Is Amara Holdings Limited's (SGX:A34) P/E Ratio Really That Good?

Simply Wall St

Thu, Apr 4, 2019, 6:16 PM

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Amara Holdings Limited's (SGX:A34) P/E ratio and reflect on what it tells us about the company's share price. Amara Holdings has a price to earnings ratio of 8.45, based on the last twelve months. That is equivalent to an earnings yield of about 12%.

Check out our latest analysis for Amara Holdings

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 Amara Holdings:

P/E of 8.45 = SGD0.47 ÷ SGD0.056 (Based on the year to December 2018.)

Is A High P/E 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 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 Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

It's nice to see that Amara Holdings grew EPS by a stonking 34% in the last year. Unfortunately, earnings per share are down 6.4% a year, over 5 years.

How Does Amara Holdings's P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Amara Holdings has a lower P/E than the average (20.2) in the hospitality industry classification.

SGX:A34 Price Estimation Relative to Market, April 5th 2019

Its relatively low P/E ratio indicates that Amara Holdings 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. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. 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.

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.