This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Boustead Projects Limited's (SGX:AVM) P/E ratio and reflect on what it tells us about the company's share price. Boustead Projects has a price to earnings ratio of 11.42, based on the last twelve months. That is equivalent to an earnings yield of about 8.8%.
View our latest analysis for Boustead Projects
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 Boustead Projects:
P/E of 11.42 = SGD0.93 ÷ SGD0.081 (Based on the year to June 2019.)
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 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 Boustead Projects's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Boustead Projects has a P/E ratio that is roughly in line with the construction industry average (11.7).
Its P/E ratio suggests that Boustead Projects shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Boustead Projects's earnings per share fell by 23% in the last twelve months. But EPS is up 2.7% over the last 3 years. And EPS is down 4.8% a year, over the last 5 years. This growth rate might warrant a below average 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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.