In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how StarHub Ltd’s (SGX:CC3) P/E ratio could help you assess the value on offer. Based on the last twelve months, StarHub’s P/E ratio is 13.48. That means that at current prices, buyers pay SGD13.48 for every SGD1 in trailing yearly profits.
See our latest analysis for StarHub
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 StarHub:
P/E of 13.48 = SGD1.57 ÷ SGD0.12 (Based on the year to December 2018.)
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 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. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
StarHub saw earnings per share decrease by 18% last year. And over the longer term (5 years) earnings per share have decreased 12% annually. This growth rate might warrant a below average P/E ratio.
How Does StarHub’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (14.5) for companies in the wireless telecom industry is roughly the same as StarHub’s P/E.
StarHub’s P/E tells us that market participants think its prospects are roughly in line with its industry. So if StarHub actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
StarHub’s Balance Sheet
StarHub’s net debt is 31% of its market cap. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.