Here’s What Delfi Limited’s (SGX:P34) P/E Is Telling Us

David Rizzo

Sun, Feb 17, 2019, 11:28 PM

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Delfi Limited’s (SGX:P34) P/E ratio could help you assess the value on offer. Delfi has a price to earnings ratio of 30.24, based on the last twelve months. That means that at current prices, buyers pay SGD30.24 for every SGD1 in trailing yearly profits.

See our latest analysis for Delfi

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

Or for Delfi:

P/E of 30.24 = $1.07 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.035 (Based on the year to September 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each SGD1 of company earnings. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’

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 unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

Delfi’s earnings per share grew by -3.2% in the last twelve months. And earnings per share have improved by 51% annually, over the last three years. In contrast, EPS has decreased by 28%, annually, over 5 years.

How Does Delfi’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. As you can see below, Delfi has a higher P/E than the average company (13.6) in the food industry.

Delfi’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.