Don't Sell AWF Madison Group Limited (NZSE:AWF) Before You Read This

By
Simply Wall St
Published
October 13, 2019
NZSE:AGL
Source: Shutterstock

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use AWF Madison Group Limited's (NZSE:AWF) P/E ratio to inform your assessment of the investment opportunity. AWF Madison Group has a P/E ratio of 29.83, based on the last twelve months. That corresponds to an earnings yield of approximately 3.4%.

See our latest analysis for AWF Madison Group

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 AWF Madison Group:

P/E of 29.83 = NZ$1.82 ÷ NZ$0.06 (Based on the trailing twelve months to March 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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 Does AWF Madison Group's P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (21.8) for companies in the professional services industry is lower than AWF Madison Group's P/E.

NZSE:AWF Price Estimation Relative to Market, October 13th 2019
NZSE:AWF Price Estimation Relative to Market, October 13th 2019

That means that the market expects AWF Madison Group will outperform other companies in its industry.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

AWF Madison Group saw earnings per share decrease by 61% last year. And EPS is down 17% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio. So if AWF Madison Group grows EPS going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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.

AWF Madison Group's Balance Sheet

AWF Madison Group has net debt equal to 43% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.

The Bottom Line On AWF Madison Group's P/E Ratio

AWF Madison Group trades on a P/E ratio of 29.8, which is above its market average of 18.3. With some debt but no EPS growth last year, the market has high expectations of future profits.

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. 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 AWF Madison Group. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.

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. Thank you for reading.

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