The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Jarllytec Co., Ltd.’s (GTSM:3548) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Jarllytec’s P/E ratio is 10.43. That is equivalent to an earnings yield of about 9.6%.

See our latest analysis for Jarllytec

### 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 Jarllytec:

P/E of 10.43 = TWD83.10 ÷ TWD7.97 (Based on the trailing twelve months to September 2019.)

### Is A High P/E 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.

### Does Jarllytec Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Jarllytec has a lower P/E than the average (15.1) P/E for companies in the electronic industry.

This suggests that market participants think Jarllytec will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.

### How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

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It’s great to see that Jarllytec grew EPS by 16% in the last year. And it has bolstered its earnings per share by 14% per year over the last five years. So one might expect an above average P/E ratio.

### 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. 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).

### Jarllytec’s Balance Sheet

With net cash of NT\$1.2b, Jarllytec has a very strong balance sheet, which may be important for its business. Having said that, at 23% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

### The Bottom Line On Jarllytec’s P/E Ratio

Jarllytec’s P/E is 10.4 which is below average (16.0) in the TW market. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. The relatively low P/E ratio implies the market is pessimistic.

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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

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Of course you might be able to find a better stock than Jarllytec. 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 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.

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. Thank you for reading.

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