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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Regis Resources Limited’s (ASX:RRL) P/E ratio and reflect on what it tells us about the company’s share price. What is Regis Resources’s P/E ratio? Well, based on the last twelve months it is 15.44. That is equivalent to an earnings yield of about 6.5%.
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 Regis Resources:
P/E of 15.44 = A$5.11 ÷ A$0.33 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each A$1 of company earnings. 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 Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Regis Resources had pretty flat EPS growth in the last year. But it has grown its earnings per share by 5.6% per year over the last five years.
How Does Regis Resources’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Regis Resources has a higher P/E than the average company (12.1) in the metals and mining industry.
Regis Resources’s P/E tells us that market participants think the company will perform better than its industry peers, going forward.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn’t take debt or cash into account. 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.
How Does Regis Resources’s Debt Impact Its P/E Ratio?
The extra options and safety that comes with Regis Resources’s AU$187m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On Regis Resources’s P/E Ratio
Regis Resources has a P/E of 15.4. That’s around the same as the average in the AU market, which is 15.9. Recent earnings growth wasn’t bad. Also positive, the relatively strong balance sheet will allow for investment in growth. If this occurs the current P/E might prove to signify undervaluation.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ So this free report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than Regis Resources. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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 firstname.lastname@example.org. 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.