This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use SafeCharge International Group Limited’s (LON:SCH) P/E ratio to inform your assessment of the investment opportunity. SafeCharge International Group has a price to earnings ratio of 19.6, based on the last twelve months. In other words, at today’s prices, investors are paying £19.6 for every £1 in prior year profit.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for SafeCharge International Group:
P/E of 19.6 = $3.14 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.16 (Based on the year to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each £1 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 Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
SafeCharge International Group had pretty flat EPS growth in the last year. But over the longer term (5 years) earnings per share have increased by 26%.
How Does SafeCharge International Group’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (30.8) for companies in the it industry is higher than SafeCharge International Group’s P/E.
This suggests that market participants think SafeCharge International Group will underperform other companies in its industry. Since the market seems unimpressed with SafeCharge International Group, it’s quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
SafeCharge International Group’s Balance Sheet
The extra options and safety that comes with SafeCharge International Group’s US$86m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On SafeCharge International Group’s P/E Ratio
SafeCharge International Group trades on a P/E ratio of 19.6, which is above the GB market average of 14.9. Recent earnings growth wasn’t bad. And the healthy balance sheet means the company can sustain growth while the P/E suggests shareholders think it will.
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 visual report on analyst forecasts could hold they key to an excellent investment decision.
Of course you might be able to find a better stock than SafeCharge International Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.