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 apply a basic P/E ratio analysis to ComfortDelGro Corporation Limited's (SGX:C52), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, ComfortDelGro has a P/E ratio of 17.27. That corresponds to an earnings yield of approximately 5.8%.
Check out our latest analysis for ComfortDelGro
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for ComfortDelGro:
P/E of 17.27 = SGD2.46 ÷ SGD0.14 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Does ComfortDelGro's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (16.4) for companies in the transportation industry is roughly the same as ComfortDelGro's P/E.
ComfortDelGro's P/E tells us that market participants think its prospects are roughly in line with its industry. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. 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.
ComfortDelGro increased earnings per share by 9.7% last year. And earnings per share have improved by 1.9% annually, over the last five years.
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Is Debt Impacting ComfortDelGro's P/E?
Net debt totals just 1.6% of ComfortDelGro's market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.