This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use SKYCITY Entertainment Group Limited's (NZSE:SKC) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, SKYCITY Entertainment Group's P/E ratio is 15.21. That means that at current prices, buyers pay NZ$15.21 for every NZ$1 in trailing yearly profits.
View our latest analysis for SKYCITY Entertainment Group
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for SKYCITY Entertainment Group:
P/E of 15.21 = NZD3.62 ÷ NZD0.24 (Based on the year to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each NZD1 the company has earned over the last year. 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 Does SKYCITY Entertainment Group'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 SKYCITY Entertainment Group has a P/E ratio that is fairly close for the average for the hospitality industry, which is 15.2.
Its P/E ratio suggests that SKYCITY Entertainment Group shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
SKYCITY Entertainment Group maintained roughly steady earnings over the last twelve months. But over the longer term (5 years) earnings per share have increased by 7.0%.
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.
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 SKYCITY Entertainment Group's Balance Sheet Tell Us?
SKYCITY Entertainment Group has net debt worth 22% of its market capitalization. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.
The Verdict On SKYCITY Entertainment Group's P/E Ratio
SKYCITY Entertainment Group trades on a P/E ratio of 15.2, which is below the NZ market average of 20.2. The company hasn't stretched its balance sheet, and earnings are improving. If you believe growth will continue - or even increase - then the low P/E may signify opportunity.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.
2020-02-10 00:56:15Z
https://finance.yahoo.com/news/dont-sell-skycity-entertainment-group-004430931.html
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