In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Far East Orchard Limited's (SGX:O10) P/E ratio and reflect on what it tells us about the company's share price. What is Far East Orchard's P/E ratio? Well, based on the last twelve months it is 19.66. That means that at current prices, buyers pay SGD19.66 for every SGD1 in trailing yearly profits.
Check out our latest analysis for Far East Orchard
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 Far East Orchard:
P/E of 19.66 = SGD1.17 ÷ SGD0.06 (Based on the trailing twelve months to December 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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.
Does Far East Orchard Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (11.8) for companies in the real estate industry is lower than Far East Orchard's P/E.
Far East Orchard's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Far East Orchard shrunk earnings per share by 22% over the last year. And it has shrunk its earnings per share by 7.9% per year over the last five years. This could justify a pessimistic P/E.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
Far East Orchard's Balance Sheet
Net debt totals 60% of Far East Orchard's market cap. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.