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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to South Port New Zealand Limited's (NZSE:SPN), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, South Port New Zealand has a P/E ratio of 19.06. In other words, at today's prices, investors are paying NZ$19.06 for every NZ$1 in prior year profit.
Check out our latest analysis for South Port New Zealand
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for South Port New Zealand:
P/E of 19.06 = NZ$6.75 ÷ NZ$0.35 (Based on the trailing twelve months to December 2018.)
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.
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. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
South Port New Zealand had pretty flat EPS growth in the last year. But it has grown its earnings per share by 8.2% per year over the last five years.
How Does South Port New Zealand's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see South Port New Zealand has a lower P/E than the average (23.4) in the infrastructure industry classification.
This suggests that market participants think South Port New Zealand will underperform other companies in its industry. Since the market seems unimpressed with South Port New Zealand, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.