Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Second Chance Properties Ltd's (SGX:528) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Second Chance Properties's P/E ratio is 27.56. That is equivalent to an earnings yield of about 3.6%.
View our latest analysis for Second Chance Properties
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 Second Chance Properties:
P/E of 27.56 = SGD0.22 ÷ SGD0.01 (Based on the trailing twelve months to May 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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 Second Chance Properties Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Second Chance Properties has a higher P/E than the average company (12.1) in the specialty retail industry.
Its relatively high P/E ratio indicates that Second Chance Properties shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. 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. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Second Chance Properties's earnings per share fell by 15% in the last twelve months. And it has shrunk its earnings per share by 38% per year over the last five years. This could justify a pessimistic P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.