What Does Exchange Income Corporation's (TSE:EIF) P/E Ratio Tell You?
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Exchange Income Corporation's (TSE:EIF) P/E ratio to inform your assessment of the investment opportunity. Exchange Income has a P/E ratio of 17.57, based on the last twelve months. That means that at current prices, buyers pay CA$17.57 for every CA$1 in trailing yearly profits.
Check out our latest analysis for Exchange Income
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Exchange Income:
P/E of 17.57 = CA$40.06 ÷ CA$2.28 (Based on the trailing twelve months to June 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 isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Does Exchange Income's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Exchange Income has a higher P/E than the average company (10.2) in the airlines industry.
Its relatively high P/E ratio indicates that Exchange Income shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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 even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Exchange Income saw earnings per share improve by -3.1% last year. And it has bolstered its earnings per share by 39% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. 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 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.
So What Does Exchange Income's Balance Sheet Tell Us?
Exchange Income has net debt worth 72% of its market capitalization. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Bottom Line On Exchange Income's P/E Ratio
Exchange Income trades on a P/E ratio of 17.6, which is above its market average of 14.3. With significant debt and fairly modest EPS growth last year, shareholders are betting on sustained improvement.
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Exchange Income 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).
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.
