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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Watkin Jones Plc’s (LON:WJG) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Watkin Jones’s P/E ratio is 12.96. That is equivalent to an earnings yield of about 7.7%.
See our latest analysis for Watkin Jones
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 Watkin Jones:
P/E of 12.96 = £2.25 ÷ £0.17 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each £1 the company has earned over the last year. 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
When earnings fall, the ‘E’ decreases, over time. 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.
Watkin Jones increased earnings per share by an impressive 23% over the last twelve months. Unfortunately, earnings per share are down 73% a year, over 5 years.
How Does Watkin Jones’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Watkin Jones has a higher P/E than the average company (10.4) in the real estate industry.
Its relatively high P/E ratio indicates that Watkin Jones shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors 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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
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.
Is Debt Impacting Watkin Jones’s P/E?
The extra options and safety that comes with Watkin Jones’s UK£81m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.