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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 Jardine Cycle & Carriage Limited’s (SGX:C07) P/E ratio to inform your assessment of the investment opportunity. Jardine Cycle & Carriage has a price to earnings ratio of 18.38, based on the last twelve months. In other words, at today’s prices, investors are paying SGD18.38 for every SGD1 in prior year profit.
How Do You Calculate Jardine Cycle & Carriage’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Jardine Cycle & Carriage:
P/E of 18.38 = $27.05 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $1.47 (Based on the year to September 2018.)
Is A High P/E 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
When earnings fall, the ‘E’ decreases, over time. 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.
Jardine Cycle & Carriage saw earnings per share decrease by 27% last year. And over the longer term (5 years) earnings per share have decreased 8.5% annually. This might lead to muted expectations.
How Does Jardine Cycle & Carriage’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 (9.1) for companies in the retail distributors industry is lower than Jardine Cycle & Carriage’s P/E.
Its relatively high P/E ratio indicates that Jardine Cycle & Carriage shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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.
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 Jardine Cycle & Carriage’s P/E?
Net debt totals 43% of Jardine Cycle & Carriage’s market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Verdict On Jardine Cycle & Carriage’s P/E Ratio
Jardine Cycle & Carriage trades on a P/E ratio of 18.4, which is above the SG market average of 11.8. With modest debt but no EPS growth in the last year, it’s fair to say the P/E implies some optimism about future earnings, from the market.
Investors should be looking to buy stocks that the market is wrong about. 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 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 Jardine Cycle & Carriage. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 email@example.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. On rare occasion, data errors may occur. Thank you for reading.