In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at iFAST Corporation Ltd.'s (SGX:AIY) P/E ratio and reflect on what it tells us about the company's share price. iFAST has a price to earnings ratio of 28.79, based on the last twelve months. That is equivalent to an earnings yield of about 3.5%.
See our latest analysis for iFAST
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 iFAST:
P/E of 28.79 = SGD1.00 ÷ SGD0.03 (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 a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
Does iFAST Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (16.7) for companies in the capital markets industry is lower than iFAST's P/E.
Its relatively high P/E ratio indicates that iFAST shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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. 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.
iFAST saw earnings per share decrease by 3.1% last year. But it has grown its earnings per share by 3.4% per year over the last three years. And over the longer term (5 years) earnings per share have decreased 6.5% annually. So we might expect a relatively low P/E.
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 investing in growth. That means taking on debt (or spending its cash).