Here’s How P/E Ratios Can Help Us Understand Haw Par Corporation Limited (SGX:H02)
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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 Haw Par Corporation Limited’s (SGX:H02) P/E ratio to inform your assessment of the investment opportunity. Haw Par has a P/E ratio of 15.37, based on the last twelve months. That is equivalent to an earnings yield of about 6.5%.
Check out our latest analysis for Haw Par
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 Haw Par:
P/E of 15.37 = SGD12.28 ÷ SGD0.80 (Based on the trailing twelve months to September 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 SGD1 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
If earnings fall then in the future the ‘E’ will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Haw Par increased earnings per share by a whopping 37% last year. And earnings per share have improved by 3.5% annually, over the last five years. So we’d generally expect it to have a relatively high P/E ratio. Unfortunately, earnings per share are down 5.5% a year, over 3 years.
How Does Haw Par’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (16.5) for companies in the pharmaceuticals industry is roughly the same as Haw Par’s P/E.
That indicates that the market expects Haw Par will perform roughly in line with other companies in its industry. So if Haw Par actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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).
Is Debt Impacting Haw Par’s P/E?
Since Haw Par holds net cash of S$471m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Haw Par’s P/E Ratio
Haw Par has a P/E of 15.4. That’s higher than the average in the SG market, which is 12.1. Its net cash position supports a higher P/E ratio, as does its solid recent earnings growth. So it does not seem strange that the P/E is above average.
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: Haw Par 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.
