Read This Before You Buy OSK Holdings Berhad (KLSE:OSK) Because Of Its P/E Ratio

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use OSK Holdings Berhad's (KLSE:OSK) P/E ratio to inform your assessment of the investment opportunity. OSK Holdings Berhad has a price to earnings ratio of 4.74, based on the last twelve months. That corresponds to an earnings yield of approximately 21.1%.

View our latest analysis for OSK Holdings Berhad

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for OSK Holdings Berhad:

P/E of 4.74 = MYR0.99 ÷ MYR0.21 (Based on the trailing twelve months to September 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each MYR1 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.

Does OSK Holdings Berhad Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (9.9) for companies in the real estate industry is higher than OSK Holdings Berhad's P/E.

OSK Holdings Berhad's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with OSK Holdings Berhad, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

OSK Holdings Berhad's earnings made like a rocket, taking off 69% last year. And earnings per share have improved by 20% annually, over the last three years. So we'd absolutely expect it to have a relatively high P/E ratio.

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. 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.

How Does OSK Holdings Berhad's Debt Impact Its P/E Ratio?

Net debt totals 91% of OSK Holdings Berhad's market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Bottom Line On OSK Holdings Berhad's P/E Ratio

OSK Holdings Berhad trades on a P/E ratio of 4.7, which is below the MY market average of 14.7. The company may have significant debt, but EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.

Of course you might be able to find a better stock than OSK Holdings Berhad. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

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. Thank you for reading.