The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at HRnetGroup Limited’s (SGX:CHZ) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, HRnetGroup’s P/E ratio is 12.61. In other words, at today’s prices, investors are paying SGD12.61 for every SGD1 in prior year profit.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for HRnetGroup:
P/E of 12.61 = SGD0.61 ÷ SGD0.05 (Based on the year to September 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 HRnetGroup’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. The image below shows that HRnetGroup has a lower P/E than the average (21.5) P/E for companies in the professional services industry.
Its relatively low P/E ratio indicates that HRnetGroup shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with HRnetGroup, it’s quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
HRnetGroup’s earnings per share fell by 19% in the last twelve months. But it has grown its earnings per share by 2.3% per year over the last five years. And EPS is down 3.0% a year, over the last 3 years. This might lead to low expectations.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. 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.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
HRnetGroup’s Balance Sheet
With net cash of S$264m, HRnetGroup has a very strong balance sheet, which may be important for its business. Having said that, at 43% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On HRnetGroup’s P/E Ratio
HRnetGroup has a P/E of 12.6. That’s around the same as the average in the SG market, which is 13.6. Although the recent drop in earnings per share would keep the market cautious, the relatively strong balance sheet will allow the company to weather a storm; so it isn’t very surprising to see that it has a P/E ratio close to the market average.
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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than HRnetGroup. 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 firstname.lastname@example.org. 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.
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