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 Southern Cross Electrical Engineering Limited's (ASX:SXE) P/E ratio and reflect on what it tells us about the company's share price. Southern Cross Electrical Engineering has a P/E ratio of 10.01, based on the last twelve months. That corresponds to an earnings yield of approximately 10.0%.
Check out our latest analysis for Southern Cross Electrical Engineering
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Southern Cross Electrical Engineering:
P/E of 10.01 = A$0.55 ÷ A$0.05 (Based on the trailing twelve months to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
How Does Southern Cross Electrical Engineering's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Southern Cross Electrical Engineering has a lower P/E than the average (13.8) P/E for companies in the construction industry.
This suggests that market participants think Southern Cross Electrical Engineering will underperform other companies in its industry. Since the market seems unimpressed with Southern Cross Electrical Engineering, it's quite possible it could surprise on the upside. 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
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Southern Cross Electrical Engineering increased earnings per share by a whopping 34% last year. And its annual EPS growth rate over 5 years is 2.6%. So we'd generally expect it to have a relatively high P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.