Does UniVision Engineering Limited (LON:UVEL) Have A Good P/E Ratio?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how UniVision Engineering Limited's (LON:UVEL) P/E ratio could help you assess the value on offer. UniVision Engineering has a price to earnings ratio of 5.38, based on the last twelve months. That is equivalent to an earnings yield of about 19%.

Check out our latest analysis for UniVision Engineering

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for UniVision Engineering:

P/E of 5.38 = £0.021 ÷ £0.0040 (Based on the trailing twelve months to September 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each £1 of company earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in 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 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.

It's nice to see that UniVision Engineering grew EPS by a stonking 174% in the last year. And it has improved its earnings per share by 89% per year over the last three years. So we'd generally expect it to have a relatively high P/E ratio. But earnings per share are down 23% per year over the last five years.

How Does UniVision Engineering's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see UniVision Engineering has a lower P/E than the average (16.3) in the electronic industry classification.

Its relatively low P/E ratio indicates that UniVision Engineering shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with UniVision Engineering, 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

The 'Price' in P/E reflects the market capitalization of the company. 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.

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 UniVision Engineering's P/E?

Since UniVision Engineering holds net cash of UK£3.2m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On UniVision Engineering's P/E Ratio

UniVision Engineering trades on a P/E ratio of 5.4, which is below the GB market average of 15.8. It grew its EPS nicely over the last year, and the healthy balance sheet implies there is more potential for growth. The relatively low P/E ratio implies the market is pessimistic.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.

But note: UniVision Engineering may not be the best stock to buy. So take a peek at this freelist of interesting companies with strong recent earnings growth (and a P/E ratio 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 editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.