The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Frenkel Topping Group Plc’s (LON:FEN) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Frenkel Topping Group’s P/E ratio is 19.07. In other words, at today’s prices, investors are paying £19.07 for every £1 in prior year profit.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Frenkel Topping Group:
P/E of 19.07 = £0.29 ÷ £0.015 (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. 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.
Frenkel Topping Group shrunk earnings per share by 11% over the last year. But it has grown its earnings per share by 2.5% per year over the last three years. And EPS is down 2.3% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.
How Does Frenkel Topping Group’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below Frenkel Topping Group has a P/E ratio that is fairly close for the average for the capital markets industry, which is 18.9.
Frenkel Topping Group’s P/E tells us that market participants think its prospects are roughly in line with its industry. The company could surprise by performing better than average, in the future. I inform my view byby checking management tenure and remuneration, among other things.
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
How Does Frenkel Topping Group’s Debt Impact Its P/E Ratio?
Frenkel Topping Group has net cash of UK£1.8m. 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 Frenkel Topping Group’s P/E Ratio
Frenkel Topping Group has a P/E of 19.1. That’s higher than the average in the GB market, which is 14.6. The recent drop in earnings per share might keep value investors away, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. 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 Frenkel Topping Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 firstname.lastname@example.org.