Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll show how you can use Japan Publications Trading Co., Ltd.’s (TYO:8072) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Japan Publications Trading has a P/E ratio of 12.53. That is equivalent to an earnings yield of about 8.0%.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Japan Publications Trading:
P/E of 12.53 = JPY1474.00 ÷ JPY117.60 (Based on the trailing twelve months to December 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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 Japan Publications Trading Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below Japan Publications Trading has a P/E ratio that is fairly close for the average for the retail distributors industry, which is 12.5.
That indicates that the market expects Japan Publications Trading will perform roughly in line with other companies in its industry. So if Japan Publications Trading actually outperforms its peers going forward, that should be a positive for the share price. 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
Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Japan Publications Trading shrunk earnings per share by 6.9% last year. But EPS is up 4.0% over the last 3 years. And over the longer term (5 years) earnings per share have decreased 4.4% annually. So you wouldn’t expect a very high P/E.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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.
How Does Japan Publications Trading’s Debt Impact Its P/E Ratio?
Japan Publications Trading has net debt equal to 45% of its market cap. While it’s worth keeping this in mind, it isn’t a worry.
The Bottom Line On Japan Publications Trading’s P/E Ratio
Japan Publications Trading has a P/E of 12.5. That’s below the average in the JP market, which is 15.6. Since it only carries a modest debt load, it’s likely the low expectations implied by the P/E ratio arise from the lack of recent earnings growth.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine. Although we don’t have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
But note: Japan Publications Trading 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).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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