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How To Use The P/E Ratio?
Education | 04 July 2014
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Like the P/B ratio discussed earlier, the Price to Earnings (P/E) ratio is part of the family of valuation ratios.

Despite its limitations where we will discuss further, it is still one of the most common measures to identify how expensive or cheap a stock is.

Lets first understand what the P/E really is!

The P/E ratio is a valuation of a company’s current share price compared to its per-share earnings.

Effectively it is calculated by dividing the current market price of the share by the earnings per share. Earning per share can be derived by dividing the net profit after tax (earnings) generated by the number of shares issued.

Formula: P/E = Market Price Per Share / Earnings Per Share

Example Walkthrough
Let’s walk this through an example. I am using a company listed on the Singapore Stock exchange, AIMS AMP Capital Industrial REIT Management (AIMS).

Firing this up on the search bar of Shares Investment’s website, you’ll see this summary of numbers in the corporate profile of the company.

Corporate profile of AIMS

Notice that the P/E ratio written here is 10.7. Now, let’s work it out on our own to see if you’re getting it right.

Financials of AIMS

Using the latest fields selected, as shown by the figures boxed up in black, we plug them into the formula above to get the price earnings ratio.

By dividing the current price of AIMSAMP Cap Reit of $1.44 by its latest FY14 EPS of 0.135, you would’ve gotten a P/E of 10.7.

Therefore this means that the current price of $1.44 that AIMSAMP Cap Reit is trading at is 10.7 times the amount of profit it generates a year.

Besides being a indicator of how cheap or expensive the stock currently is compared to its earnings, you may infer or have an idea of what the market is currently willing to pay for a company’s earnings.

Therefore, a higher P/E would generally mean that investors are more optimistic of the stock’s growth potential perhaps due to announcement of positive results, low debt level, significance of future catalyst or high dividend yield, etc and are willing to pay more.

On the contrary, a low P/E would indicate that the stock is either a bargain or troubled.

Generally it’s advised that we should always compare the P/E ratio of companies relative to its industry or industry average. In this case, I have filtered out 4 property developers in Singapore.

As you may observe, Capitaland and CityDev’s P/E is relatively high as compared to other participants that are smaller and with less coverage, this shows the market’s optimism and confidence of the growth potential of well know developers with a good track record.

Comparison of property peers

However, the small cap property companies looks ridiculously cheap as compared to the big boys in the property sector. However, before we make a call to buy its stock we should always dig deeper and ask ourselves why is it cheap?

In the case of these smaller property developers like Ho Bee Land and Wing Tai and Hong Fok whose portfolio comprise mainly in Singapore has seen its share price battered down in recent months.

This is a result of the cooling measures implemented by the government and has greatly depressed its sales outlook.

However, the case of Debao Properties is slightly different, as property developer based in China, investors could have given it a miss due to the unfamilaritiy of its properties based in China or the risk of accounting fraud that Chinese companies hold.

These are all factors that one may want to take into account when evaluating individual companies. Its therefore important to take into consideration the qualitative aspects when evaluating companies as sometimes a cheap company with bad business prospects may become cheaper.

Its important to note of the various limitation of the P/E ratio:

1. Unlike cash flow, earnings is highly subjected to manipulation, some examples are one off expenses or incomes that are non recurring or delaying expenses.

2. Because P/E focuses on current price and market capitalization it ignores the impact of debt. Therefore a company with a low P/E may be due to its high and unsustainable debt levels.

AIMS APAC REIT  1.370 -0.110 -7.43%   
Business: Co is a real estate investment trust with a focus on distribution activities, business park activities and manufacturing activities.

Insight: Feb-19, 3Q19 gross revenue slipped 0.8% to $88.2m ... Read More
CapitaLand  3.560 +0.02 +0.56%   
Business: Co develops, owns, and manages real estate properties. [FY18 Geographical] China (41.2%), S'pore (38.5%), Europe & others (18.6%), Vietnam & Others (1.7%).

Insight: Apr-19, 1Q19 revenue fell 23.8% while net profit d... Read More
City Developments  9.880 +0.15 +1.54%   
Business: Co is an international property & hotel conglomerate. [FY18 Turnover] Property development (48.4%), hotel operations (39.8%), rental properties (8.5%), others (3.3%).

Insight: May-19, 1Q19 decreased 29.5% to $746.2m compared t... Read More
Ho Bee Land  2.300 -0.03 -1.29%   
Business: Invests in & develops real estate properties in Singapore. [FY18 Turnover] Rental income (91.3%), sale of development properties (8.7%).

Insight: Apr-19, 1Q19 revenue rose 7.7% due to increased re... Read More
Wing Tai Hldgs  2.050 +0.01 +0.49%   
Business: Singapore-based property developer and lifestyle company. [FY18 Turnover] Development properties (51.5%), retail (36.5%), investment properties (9.6%), others (2.4%).

Insight: Feb-19, 1H19 revenue rose 7.1% to $193.9m largely ... Read More
Hong Fok Corp  0.805 -0.005 -0.62%   
Business: Engaged in ppty invs, ppty devt, ppty mgt & invs hldg & mgt. [FY18 Turnover] Ppty investment (49.8%), ppty development and construction (48.7%), ppty management and others (1.5%).

Insight: May-19, 1Q19 revenue jumped 53.3% mainly due to th... Read More

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The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

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