Yahoo Finance Here's How P/E Ratios Can Help Us Understand Dialog Semiconductor Plc (ETR:DLG)
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Dialog Semiconductor Plc's (ETR:DLG) P/E ratio could help you assess the value on offer. What is Dialog Semiconductor's P/E ratio? Well, based on the last twelve months it is 9.59. That means that at current prices, buyers pay €9.59 for every €1 in trailing yearly profits.
View our latest analysis for Dialog Semiconductor
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Dialog Semiconductor:
P/E of 9.59 = USD41.32 (Note: this is the share price in the reporting currency, namely, USD ) ÷ USD4.31 (Based on the trailing twelve months to September 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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.
Does Dialog Semiconductor Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (27.6) for companies in the semiconductor industry is higher than Dialog Semiconductor's P/E.
Dialog Semiconductor's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
In the last year, Dialog Semiconductor grew EPS like Taylor Swift grew her fan base back in 2010; the 91% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 21% is also impressive. So I'd be surprised if the P/E ratio was not above average.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.
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.
So What Does Dialog Semiconductor's Balance Sheet Tell Us?
Dialog Semiconductor has net cash of US$1.2b. This is fairly high at 40% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Verdict On Dialog Semiconductor's P/E Ratio
Dialog Semiconductor trades on a P/E ratio of 9.6, which is below the DE market average of 20.8. 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.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Dialog Semiconductor. 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.
