In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Low Keng Huat (Singapore) Limited's (SGX:F1E), to help you decide if the stock is worth further research. What is Low Keng Huat (Singapore)'s P/E ratio? Well, based on the last twelve months it is 47.77. In other words, at today's prices, investors are paying SGD47.77 for every SGD1 in prior year profit.
View our latest analysis for Low Keng Huat (Singapore)
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Low Keng Huat (Singapore):
P/E of 47.77 = SGD0.45 ÷ SGD0.01 (Based on the trailing twelve months to July 2019.)
Is A High Price-to-Earnings 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 Low Keng Huat (Singapore) Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Low Keng Huat (Singapore) has a significantly higher P/E than the average (13.3) P/E for companies in the construction industry.
Its relatively high P/E ratio indicates that Low Keng Huat (Singapore) 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 delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Low Keng Huat (Singapore) shrunk earnings per share by 67% over the last year. And over the longer term (5 years) earnings per share have decreased 27% annually. This might lead to muted expectations.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. 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.