Yahoo Finance Is Fiducian Group Limited’s (ASX:FID) 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 Fiducian Group Limited’s (ASX:FID) P/E ratio to inform your assessment of the investment opportunity. Fiducian Group has a P/E ratio of 13.87, based on the last twelve months. That means that at current prices, buyers pay A$13.87 for every A$1 in trailing yearly profits.
Check out our latest analysis for Fiducian Group
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 Fiducian Group:
P/E of 13.87 = A$4.08 ÷ A$0.29 (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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. 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 great to see that Fiducian Group grew EPS by 22% in the last year. And earnings per share have improved by 21% annually, over the last five years. So one might expect an above average P/E ratio.
How Does Fiducian Group’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Fiducian Group has a P/E ratio that is roughly in line with the capital markets industry average (14.4).
Fiducian Group’s P/E tells us that market participants think its prospects are roughly in line with its industry. So if Fiducian Group actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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 Fiducian Group’s Debt Impact Its P/E Ratio?
Fiducian Group has net cash of AU$14m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Fiducian Group’s P/E Ratio
Fiducian Group has a P/E of 13.9. That’s below the average in the AU market, which is 15.8. Not only should the net cash position reduce risk, but the recent growth has been impressive. One might conclude that the market is a bit pessimistic, given the low P/E ratio. Given analysts are expecting further growth, one I would have expected a higher P/E ratio. So this stock may well be worth further research.
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. So this free visual report on analyst forecasts could hold they key to an excellent investment decision.
But note: Fiducian Group 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).
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.
