Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll look at U-Tech Media Corporation’s (TPE:3050) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, U-Tech Media’s P/E ratio is 12.83. That is equivalent to an earnings yield of about 7.8%.

View our latest analysis for U-Tech Media

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for U-Tech Media:

P/E of 12.83 = TWD10.75 ÷ TWD0.84 (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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

Does U-Tech Media Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (14.8) for companies in the tech industry is higher than U-Tech Media’s P/E.

TSEC:3050 Price Estimation Relative to Market, February 19th 2020
TSEC:3050 Price Estimation Relative to Market, February 19th 2020

This suggests that market participants think U-Tech Media 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

If earnings fall then in the future the ‘E’ will be lower. 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.

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In the last year, U-Tech Media grew EPS like Taylor Swift grew her fan base back in 2010; the 201% gain was both fast and well deserved. Unfortunately, earnings per share are down 5.1% a year, over 3 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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

How Does U-Tech Media’s Debt Impact Its P/E Ratio?

Net debt totals 56% of U-Tech Media’s market cap. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Verdict On U-Tech Media’s P/E Ratio

U-Tech Media trades on a P/E ratio of 12.8, which is below the TW market average of 16.3. The company may have significant debt, but EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don’t have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.

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Of course you might be able to find a better stock than U-Tech Media. 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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