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How Does UMS Holdings's (SGX:558) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

UMS Holdings (SGX:558) shares have had a really impressive month, gaining 33%, after some slippage. The full year gain of 20% is pretty reasonable, too.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock 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.

View 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 13.20. As you can see below UMS Holdings has a P/E ratio that is fairly close for the average for the semiconductor industry, which is 12.5.

SGX:558 Price Estimation Relative to Market, October 25th 2019

That indicates that the market expects UMS Holdings will perform roughly in line with other companies in its industry. So if UMS Holdings actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

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. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

UMS Holdings's earnings per share fell by 42% in the last twelve months. But EPS is up 4.5% over the last 3 years.

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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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?

Since UMS Holdings holds net cash of S$1.1m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On UMS Holdings's P/E Ratio

UMS Holdings's P/E is 13.2 which is about average (13.5) in the SG market. While the absence of growth in the last year is probably causing a degree of pessimism, the net cash position means it's not surprising that expectations put the company roughly in line with the market average P/E. What we know for sure is that investors have become more excited about UMS Holdings recently, since they have pushed its P/E ratio from 10.0 to 13.2 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

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.