Despite Its High P/E Ratio, Is ScinoPharm Taiwan, Ltd. (TPE:1789) Still Undervalued?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at ScinoPharm Taiwan, Ltd.'s (TPE:1789) P/E ratio and reflect on what it tells us about the company's share price. What is ScinoPharm Taiwan's P/E ratio? Well, based on the last twelve months it is 78.14. That is equivalent to an earnings yield of about 1.3%.

View our latest analysis for ScinoPharm Taiwan

How Do You Calculate ScinoPharm Taiwan's P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for ScinoPharm Taiwan:

P/E of 78.14 = NT$25.850 ÷ NT$0.331 (Based on the trailing twelve months to September 2019.)

(Note: the above calculation results may not be precise due to rounding.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each NT$1 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.

How Does ScinoPharm Taiwan's P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below, ScinoPharm Taiwan has a much higher P/E than the average company (18.5) in the pharmaceuticals industry.

ScinoPharm Taiwan's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. 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.

ScinoPharm Taiwan's earnings per share fell by 36% in the last twelve months. And EPS is down 19% a year, over the last 5 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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Is Debt Impacting ScinoPharm Taiwan's P/E?

ScinoPharm Taiwan has net cash of NT$3.1b. This is fairly high at 15% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Verdict On ScinoPharm Taiwan's P/E Ratio

ScinoPharm Taiwan's P/E is 78.1 which suggests the market is more focussed on the future opportunity rather than the current level of earnings. The recent drop in earnings per share would make some investors cautious, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will!

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

But note: ScinoPharm Taiwan may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.