Here’s What Ban Leong Technologies Limited’s (SGX:B26) P/E Ratio Is Telling Us
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Ban Leong Technologies Limited’s (SGX:B26) P/E ratio and reflect on what it tells us about the company’s share price. Ban Leong Technologies has a P/E ratio of 5.42, based on the last twelve months. That means that at current prices, buyers pay SGD5.42 for every SGD1 in trailing yearly profits.
View our latest analysis for Ban Leong Technologies
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Ban Leong Technologies:
P/E of 5.42 = SGD0.23 ÷ SGD0.043 (Based on the trailing twelve months to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each SGD1 the company has earned over the last year. 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. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Notably, Ban Leong Technologies grew EPS by a whopping 39% in the last year. And its annual EPS growth rate over 5 years is 40%. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does Ban Leong Technologies’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (11.4) for companies in the electronic industry is higher than Ban Leong Technologies’s P/E.
Its relatively low P/E ratio indicates that Ban Leong Technologies shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Ban Leong Technologies, 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.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
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).
How Does Ban Leong Technologies’s Debt Impact Its P/E Ratio?
Since Ban Leong Technologies holds net cash of S$1.9m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On Ban Leong Technologies’s P/E Ratio
Ban Leong Technologies trades on a P/E ratio of 5.4, which is below the SG market average of 11.7. 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.
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. We don’t have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
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.
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.
