Here’s How P/E Ratios Can Help Us Understand SA Cecurity.com (EPA:MLCEC)

Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll show how you can use SA Cecurity.com’s (EPA:MLCEC) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, SA Cecurity.com’s P/E ratio is 31.39. That corresponds to an earnings yield of approximately 3.2%.

View our latest analysis for SA Cecurity.com

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for SA Cecurity.com:

P/E of 31.39 = €0.43 ÷ €0.01 (Based on the trailing twelve months to December 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

How Does SA Cecurity.com’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (32.3) for companies in the software industry is roughly the same as SA Cecurity.com’s P/E.

ENXTPA:MLCEC Price Estimation Relative to Market, October 31st 2019
ENXTPA:MLCEC Price Estimation Relative to Market, October 31st 2019

Its P/E ratio suggests that SA Cecurity.com shareholders think that in the future it will perform about the same as other companies in its industry classification. So if SA Cecurity.com actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

How Growth Rates Impact P/E Ratios

When earnings fall, the ‘E’ decreases, over time. 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.

In the last year, SA Cecurity.com grew EPS like Taylor Swift grew her fan base back in 2010; the 63% gain was both fast and well deserved. Regrettably, the longer term performance is poor, with EPS down per year over 3 years.

Remember: P/E Ratios Don’t Consider The Balance Sheet

The ‘Price’ in P/E reflects the market capitalization of the company. So it won’t reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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.

Is Debt Impacting SA Cecurity.com’s P/E?

SA Cecurity.com has net cash of €696k. 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 Bottom Line On SA Cecurity.com’s P/E Ratio

SA Cecurity.com’s P/E is 31.4 which is above average (17.3) in its market. Its net cash position is the cherry on top of its superb EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings).

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don’t have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.

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. Thank you for reading.