Is First Resources Limited’s (SGX:EB5) P/E Ratio Really That Good?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use First Resources Limited’s (SGX:EB5) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, First Resources’s P/E ratio is 13.29. That corresponds to an earnings yield of approximately 7.5%.

See our latest analysis for First Resources

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

Or for First Resources:

P/E of 13.29 = $1.15 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.086 (Based on the year to September 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each SGD1 the company has earned over the last year. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

First Resources saw earnings per share decrease by 15% last year. But it has grown its earnings per share by 12% per year over the last three years. And it has shrunk its earnings per share by 12% per year over the last five years. This could justify a pessimistic P/E.

How Does First Resources’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below First Resources has a P/E ratio that is fairly close for the average for the food industry, which is 14.

That indicates that the market expects First Resources will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. I inform my view byby checking management tenure and remuneration, among other things.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

First Resources’s Balance Sheet

Net debt totals 17% of First Resources’s market cap. That’s enough debt to impact the P/E ratio a little; so keep it in mind if you’re comparing it to companies without debt.

The Verdict On First Resources’s P/E Ratio

First Resources trades on a P/E ratio of 13.3, which is above the SG market average of 11.9. With a bit of debt, but a lack of recent growth, it’s safe to say the market is expecting improved profit performance from the company, in the next few years.

Investors should be looking to buy stocks that the market is wrong about. 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 they key to an excellent investment decision.

You might be able to find a better buy than First Resources. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.