Do You Know What APAC Realty Limited’s (SGX:CLN) P/E Ratio Means?

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 APAC Realty Limited’s (SGX:CLN) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, APAC Realty’s P/E ratio is 5.94. That means that at current prices, buyers pay SGD5.94 for every SGD1 in trailing yearly profits.

View our latest analysis for APAC Realty

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for APAC Realty:

P/E of 5.94 = SGD0.47 ÷ SGD0.078 (Based on the year to June 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

It’s great to see that APAC Realty grew EPS by 19% in the last year. And it has bolstered its earnings per share by 26% per year over the last five years. So one might expect an above average P/E ratio.

How Does APAC Realty’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see APAC Realty has a lower P/E than the average (9.4) in the real estate industry classification.

SGX:CLN PE PEG Gauge October 27th 18
SGX:CLN PE PEG Gauge October 27th 18

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

Remember: P/E Ratios Don’t Consider The Balance Sheet

Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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 APAC Realty’s P/E?

APAC Realty has net cash of S$62m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Verdict On APAC Realty’s P/E Ratio

APAC Realty’s P/E is 5.9 which is below average (11.7) in the SG market. Not only should the net cash position reduce risk, but the recent growth has been impressive. The relatively low P/E ratio implies the market is pessimistic.

Investors should be looking to buy stocks that the market is wrong about. 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. So this free visual report on analyst forecasts could hold they key to an excellent investment decision.

But note: APAC Realty may not be the best stock to buy. So take a peek at this free list 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.