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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 look at Karin Technology Holdings Limited's (SGX:K29) P/E ratio and reflect on what it tells us about the company's share price. Karin Technology Holdings has a price to earnings ratio of 10.51, based on the last twelve months. In other words, at today's prices, investors are paying SGD10.51 for every SGD1 in prior year profit.
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See our latest analysis for Karin Technology Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Karin Technology Holdings:
P/E of 10.51 = HK$1.8 (Note: this is the share price in the reporting currency, namely, HKD ) ÷ HK$0.17 (Based on the year to December 2018.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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 Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Karin Technology Holdings's earnings made like a rocket, taking off 54% last year. Unfortunately, earnings per share are down 2.2% a year, over 5 years.
Does Karin Technology Holdings 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. The image below shows that Karin Technology Holdings has a lower P/E than the average (11.9) P/E for companies in the electronic industry.
Karin Technology Holdings's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. 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.