U.S. Markets close in 5 hrs 15 mins
  • S&P 500

    4,063.04
    -89.06 (-2.14%)
     
  • Dow 30

    33,587.66
    -681.50 (-1.99%)
     
  • Nasdaq

    13,031.68
    -357.75 (-2.67%)
     
  • Russell 2000

    2,132.86
    -74.13 (-3.36%)
     
  • Crude Oil

    63.78
    -2.30 (-3.48%)
     
  • Gold

    1,827.90
    +5.10 (+0.28%)
     
  • Silver

    27.10
    -0.56 (-2.03%)
     
  • EUR/USD

    1.2080
    -0.0072 (-0.5919%)
     
  • 10-Yr Bond

    1.6950
    +0.0710 (+4.37%)
     
  • Vix

    28.25
    +6.41 (+29.35%)
     
  • GBP/USD

    1.4057
    -0.0087 (-0.6171%)
     
  • USD/JPY

    109.6200
    +1.0000 (+0.9206%)
     
  • BTC-USD

    50,599.10
    +231.25 (+0.46%)
     
  • CMC Crypto 200

    1,468.19
    -95.64 (-6.12%)
     
  • FTSE 100

    7,004.63
    +56.64 (+0.82%)
     
  • Nikkei 225

    28,147.51
    -461.08 (-1.61%)
     

Do You Like Synectics plc (LON:SNX) At This P/E Ratio?

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
Simply Wall St
·4 min read
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Synectics plc's (LON:SNX), to help you decide if the stock is worth further research. Based on the last twelve months, Synectics's P/E ratio is 11.35. That means that at current prices, buyers pay £11.35 for every £1 in trailing yearly profits.

See our latest analysis for Synectics

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Synectics:

P/E of 11.35 = £1.100 ÷ £0.097 (Based on the year to November 2019.)

(Note: the above calculation results may not be precise due to rounding.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each £1 the company has earned over the last year. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price'.

How Does Synectics's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (17.4) for companies in the electronic industry is higher than Synectics's P/E.

AIM:SNX Price Estimation Relative to Market May 19th 2020
AIM:SNX Price Estimation Relative to Market May 19th 2020

This suggests that market participants think Synectics will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

Synectics increased earnings per share by 5.1% last year. And its annual EPS growth rate over 3 years is 2.6%.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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).

How Does Synectics's Debt Impact Its P/E Ratio?

With net cash of UK£3.6m, Synectics has a very strong balance sheet, which may be important for its business. Having said that, at 19% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On Synectics's P/E Ratio

Synectics's P/E is 11.3 which is below average (13.5) in the GB market. EPS was up modestly better over the last twelve months. And the net cash position gives the company many options. So it's strange that the low P/E indicates low expectations. Given analysts are expecting further growth, one might have expected a higher P/E ratio. That may be worth further research.

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: Synectics 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).

Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email 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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.