Should You Be Tempted To Sell Excelpoint Technology Ltd. (SGX:BDF) Because Of Its P/E Ratio?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll apply a basic P/E ratio analysis to Excelpoint Technology Ltd.’s (SGX:BDF), to help you decide if the stock is worth further research. What is Excelpoint Technology’s P/E ratio? Well, based on the last twelve months it is 12.44. That is equivalent to an earnings yield of about 8.0%.

Check out our latest analysis for Excelpoint Technology

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)

Or for Excelpoint Technology:

P/E of 12.44 = USD0.33 (Note: this is the share price in the reporting currency, namely, USD ) ÷ USD0.03 (Based on the trailing twelve months to September 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each USD1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Does Excelpoint Technology’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Excelpoint Technology has a P/E ratio that is roughly in line with the electronic industry average (11.6).

SGX:BDF Price Estimation Relative to Market, January 28th 2020
SGX:BDF Price Estimation Relative to Market, January 28th 2020

Its P/E ratio suggests that Excelpoint Technology shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.

Excelpoint Technology saw earnings per share decrease by 65% last year. And it has shrunk its earnings per share by 16% per year over the last five years. This might lead to muted expectations.

Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.

How Does Excelpoint Technology’s Debt Impact Its P/E Ratio?

Excelpoint Technology has net debt worth a very significant 213% of its market capitalization. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.

The Bottom Line On Excelpoint Technology’s P/E Ratio

Excelpoint Technology has a P/E of 12.4. That’s around the same as the average in the SG market, which is 13.4. With significant debt and no EPS growth last year, the P/E suggests shareholders are expecting higher profit in the future.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 be able to find a better stock than Excelpoint Technology. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.