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 New Zealand King Salmon Investments Limited’s (NZSE:NZK) P/E ratio to inform your assessment of the investment opportunity. New Zealand King Salmon Investments has a P/E ratio of 18.17, based on the last twelve months. That corresponds to an earnings yield of approximately 5.5%.
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How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for New Zealand King Salmon Investments:
P/E of 18.17 = NZ$2.18 ÷ NZ$0.12 (Based on the trailing twelve months to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each NZ$1 the company has earned over the last year. 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 Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
New Zealand King Salmon Investments’s earnings per share fell by 25% in the last twelve months. But EPS is up 22% over the last 5 years.
How Does New Zealand King Salmon Investments’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that New Zealand King Salmon Investments has a P/E ratio that is roughly in line with the food industry average (17.6).
New Zealand King Salmon Investments’s P/E tells us that market participants think its prospects are roughly in line with its industry. So if New Zealand King Salmon Investments actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
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 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 New Zealand King Salmon Investments’s P/E?
Since New Zealand King Salmon Investments holds net cash of NZ$2.9m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On New Zealand King Salmon Investments’s P/E Ratio
New Zealand King Salmon Investments’s P/E is 18.2 which is above average (16.3) in the NZ market. The recent drop in earnings per share might keep value investors away, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will!
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
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 firstname.lastname@example.org.