The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use BreadTalk Group Limited's (SGX:CTN) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, BreadTalk Group has a P/E ratio of 30.98. That corresponds to an earnings yield of approximately 3.2%.
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 BreadTalk Group:
P/E of 30.98 = SGD0.65 ÷ SGD0.02 (Based on the year to September 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 BreadTalk Group's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (26.6) for companies in the hospitality industry is lower than BreadTalk Group's P/E.
Its relatively high P/E ratio indicates that BreadTalk Group shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Most would be impressed by BreadTalk Group earnings growth of 18% in the last year. And it has improved its earnings per share by 13% per year over the last three years. With that performance, you might expect an above average P/E ratio. But earnings per share are down 3.3% per year over the last five years.
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.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
How Does BreadTalk Group's Debt Impact Its P/E Ratio?
BreadTalk Group's net debt equates to 27% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.
The Verdict On BreadTalk Group's P/E Ratio
BreadTalk Group trades on a P/E ratio of 31.0, which is above its market average of 13.5. The company is not overly constrained by its modest debt levels, and its recent EPS growth very solid. So on this analysis it seems reasonable that its P/E ratio is above average.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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 be able to find a better stock than BreadTalk Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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