This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at FDM Group (Holdings) plc’s (LON:FDM) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, FDM Group (Holdings)’s P/E ratio is 23.56. That means that at current prices, buyers pay £23.56 for every £1 in trailing yearly profits.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for FDM Group (Holdings):
P/E of 23.56 = £7.56 ÷ £0.32 (Based on the year to June 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. 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 Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. 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.
FDM Group (Holdings) increased earnings per share by an impressive 16% over the last twelve months. And it has bolstered its earnings per share by 23% per year over the last five years. This could arguably justify a relatively high P/E ratio.
How Does FDM Group (Holdings)’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that FDM Group (Holdings) has a lower P/E than the average (30.8) P/E for companies in the it industry.
Its relatively low P/E ratio indicates that FDM Group (Holdings) shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with FDM Group (Holdings), 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.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Is Debt Impacting FDM Group (Holdings)’s P/E?
The extra options and safety that comes with FDM Group (Holdings)’s UK£30m 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 FDM Group (Holdings)’s P/E Ratio
FDM Group (Holdings) has a P/E of 23.6. That’s higher than the average in the GB market, which is 15. Its net cash position supports a higher P/E ratio, as does its solid recent earnings growth. So it does not seem strange that the P/E is above average.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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.
You might be able to find a better buy than FDM Group (Holdings). 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).
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 firstname.lastname@example.org.