The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Cedar Woods Properties Limited’s (ASX:CWP) P/E ratio and reflect on what it tells us about the company’s share price. Cedar Woods Properties has a P/E ratio of 10.05, based on the last twelve months. In other words, at today’s prices, investors are paying A$10.05 for every A$1 in prior year profit.

See our latest analysis for Cedar Woods Properties

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Cedar Woods Properties:

P/E of 10.05 = A$5.42 ÷ A$0.54 (Based on the year to June 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each A$1 the company has earned over the last year. 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

When earnings fall, the ‘E’ decreases, over time. 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.

Cedar Woods Properties shrunk earnings per share by 6.4% last year. But over the longer term (5 years) earnings per share have increased by 1.7%. And it has shrunk its earnings per share by 2.1% per year over the last three years. This growth rate might warrant a low P/E ratio. So you wouldn’t expect a very high P/E.

How Does Cedar Woods Properties’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below Cedar Woods Properties has a P/E ratio that is fairly close for the average for the real estate industry, which is 10.6.

Its P/E ratio suggests that Cedar Woods Properties shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. I inform my view byby checking management tenure and remuneration, among other things.

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

Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.