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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 show how you can use AEM Holdings Ltd's (SGX:AWX) P/E ratio to inform your assessment of the investment opportunity. AEM Holdings has a P/E ratio of 8.36, based on the last twelve months. That corresponds to an earnings yield of approximately 12.0%.
Check out our latest analysis for AEM Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for AEM Holdings:
P/E of 8.36 = SGD1.17 ÷ SGD0.14 (Based on the trailing twelve months to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each SGD1 the company has earned over the last year. 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 Does AEM Holdings'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 AEM Holdings has a lower P/E than the average (12.5) in the semiconductor industry classification.
This suggests that market participants think AEM Holdings will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
AEM Holdings's earnings per share fell by 1.2% in the last twelve months. But it has grown its earnings per share by 85% per year over the last five years.
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. 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.
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.
AEM Holdings's Balance Sheet
AEM Holdings has net cash of S$57m. This is fairly high at 18% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.