What Is UMS Holdings's (SGX:558) P/E Ratio After Its Share Price Rocketed?

It's great to see UMS Holdings (SGX:558) shareholders have their patience rewarded with a 32% share price pop in the last month. The full year gain of 11% is pretty reasonable, too.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that deep value investors might steer clear when expectations of a company are too high. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

Check out our latest analysis for UMS Holdings

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

UMS Holdings has a P/E ratio of 13.36. The image below shows that UMS Holdings has a P/E ratio that is roughly in line with the semiconductor industry average (13.0).

Its P/E ratio suggests that UMS Holdings shareholders think that in the future it will perform about the same as other companies in its industry classification. So if UMS Holdings actually outperforms its peers 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.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

UMS Holdings shrunk earnings per share by 42% over the last year. But it has grown its earnings per share by 4.5% per year over the last three years.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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.

Is Debt Impacting UMS Holdings's P/E?

The extra options and safety that comes with UMS Holdings's S$1.1m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Verdict On UMS Holdings's P/E Ratio

UMS Holdings has a P/E of 13.4. That's around the same as the average in the SG market, which is 13.4. 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. What is very clear is that the market has become more optimistic about UMS Holdings over the last month, with the P/E ratio rising from 10.1 back then to 13.4 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 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 find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.