Yahoo Finance Here’s What TT Electronics plc’s (LON:TTG) P/E Is Telling Us
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at TT Electronics plc’s (LON:TTG) P/E ratio and reflect on what it tells us about the company’s share price. TT Electronics has a price to earnings ratio of 16.63, based on the last twelve months. In other words, at today’s prices, investors are paying £16.63 for every £1 in prior year profit.
See our latest analysis for TT Electronics
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for TT Electronics:
P/E of 16.63 = £1.95 ÷ £0.12 (Based on the year to June 2018.)
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. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It’s nice to see that TT Electronics grew EPS by a stonking 28% in the last year. And it has bolstered its earnings per share by 21% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.
How Does TT Electronics’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that TT Electronics has a P/E ratio that is roughly in line with the electronic industry average (15.9).
That indicates that the market expects TT Electronics 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. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
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. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
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).
How Does TT Electronics’s Debt Impact Its P/E Ratio?
TT Electronics’s net debt is 13% of its market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.
The Verdict On TT Electronics’s P/E Ratio
TT Electronics trades on a P/E ratio of 16.6, which is fairly close to the GB market average of 15.6. Given it has reasonable debt levels, and grew earnings strongly last year, the P/E indicates the market has doubts this growth can be sustained.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold they key to an excellent investment decision.
Of course you might be able to find a better stock than TT Electronics. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
