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 look at AF Global Limited’s (SGX:L38) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, AF Global’s P/E ratio is 28.67. That corresponds to an earnings yield of approximately 3.5%.
View our latest analysis for AF Global
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for AF Global:
P/E of 28.67 = SGD0.16 ÷ SGD0.0057 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each SGD1 of company earnings. 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 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. Then, a higher P/E might scare off shareholders, pushing the share price down.
AF Global increased earnings per share by an impressive 12% over the last twelve months. And it has bolstered its earnings per share by 48% per year over the last five years. So one might expect an above average P/E ratio. But earnings per share are down 4.1% per year over the last three years.
How Does AF Global’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that AF Global has a higher P/E than the average (14.8) P/E for companies in the hospitality industry.
AF Global’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 investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. 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 expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.