This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how DAEA TI Co., Ltd.’s (KOSDAQ:045390) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, DAEA TI has a P/E ratio of 43.46. In other words, at today’s prices, investors are paying ₩43.46 for every ₩1 in prior year profit.

View our latest analysis for DAEA TI

How Do I Calculate DAEA TI’s Price To Earnings Ratio?

The formula for P/E is:

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

Or for DAEA TI:

P/E of 43.46 = KRW5300.00 ÷ KRW121.96 (Based on the year to September 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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 DAEA TI Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. As you can see below, DAEA TI has a higher P/E than the average company (15.6) in the electronic industry.

KOSDAQ:A045390 Price Estimation Relative to Market, January 20th 2020
KOSDAQ:A045390 Price Estimation Relative to Market, January 20th 2020

That means that the market expects DAEA TI will outperform other companies in its industry. 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.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

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In the last year, DAEA TI grew EPS like Taylor Swift grew her fan base back in 2010; the 254% gain was both fast and well deserved. The cherry on top is that the five year growth rate was an impressive 15% per year. So I’d be surprised if the P/E ratio was not above average.

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

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won’t reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

How Does DAEA TI’s Debt Impact Its P/E Ratio?

Since DAEA TI holds net cash of ₩19b, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On DAEA TI’s P/E Ratio

DAEA TI’s P/E is 43.5 which is above average (15.8) in its market. Its net cash position is the cherry on top of its superb EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings).

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. Although we don’t have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

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But note: DAEA TI 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).

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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