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Should We Worry About Firan Technology Group Corporation’s (TSE:FTG) P/E Ratio?

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Firan Technology Group Corporation’s (TSE:FTG) P/E ratio and reflect on what it tells us about the company’s share price. Firan Technology Group has a P/E ratio of 25.9, based on the last twelve months. In other words, at today’s prices, investors are paying CA$25.9 for every CA$1 in prior year profit.

View our latest analysis for Firan Technology Group

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Firan Technology Group:

P/E of 25.9 = CA$3.28 ÷ CA$0.13 (Based on the year to November 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each CA$1 of company earnings. 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 Growth Rates Impact P/E Ratios

If earnings fall then in the future the ‘E’ will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Notably, Firan Technology Group grew EPS by a whopping 125% in the last year. And earnings per share have improved by 4.6% annually, over the last five years. So we’d generally expect it to have a relatively high P/E ratio. But earnings per share are down 75% per year over the last three years.

How Does Firan Technology Group’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (17.6) for companies in the electronic industry is lower than Firan Technology Group’s P/E.

TSX:FTG Price Estimation Relative to Market, March 6th 2019
TSX:FTG Price Estimation Relative to Market, March 6th 2019

Firan Technology Group’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

Remember: P/E Ratios Don’t Consider The Balance Sheet

The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.

Is Debt Impacting Firan Technology Group’s P/E?

Net debt totals just 3.2% of Firan Technology Group’s market cap. So it doesn’t have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.

The Bottom Line On Firan Technology Group’s P/E Ratio

Firan Technology Group trades on a P/E ratio of 25.9, which is above the CA market average of 15. Its debt levels do not imperil its balance sheet and it has already proven it can grow. Therefore it seems reasonable that the market would have relatively high expectations of the company

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 visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: Firan Technology Group 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.

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