This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Concurrent Technologies Plc’s (LON:CNC) P/E ratio to inform your assessment of the investment opportunity. Concurrent Technologies has a price to earnings ratio of 19.87, based on the last twelve months. That means that at current prices, buyers pay £19.87 for every £1 in trailing yearly profits.
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 Concurrent Technologies:
P/E of 19.87 = £0.69 ÷ £0.034 (Based on the trailing twelve months 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. 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 Growth Rates Impact P/E Ratios
If earnings fall then in the future the ‘E’ will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Concurrent Technologies shrunk earnings per share by 4.7% last year. But it has grown its earnings per share by 20% per year over the last five years. And EPS is down 2.2% a year, over the last 3 years. So it would be surprising to see a high P/E.
How Does Concurrent Technologies’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Concurrent Technologies has a higher P/E than the average company (13.7) in the tech industry.
Its relatively high P/E ratio indicates that Concurrent Technologies shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
Concurrent Technologies’s Balance Sheet
Since Concurrent Technologies holds net cash of UK£7.8m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Concurrent Technologies’s P/E Ratio
Concurrent Technologies trades on a P/E ratio of 19.9, which is above the GB market average of 15.1. The recent drop in earnings per share might keep value investors away, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will!
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 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.
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.