【mountainside at silvercreek colorado】Read This Before You Buy Advanced Share Registry Limited (ASX:ASW) Because Of Its P/E Ratio

This mountainside at silvercreek coloradoarticle 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 Advanced Share Registry Limited’s (

ASX:ASW

) P/E ratio to inform your assessment of the investment opportunity.

Advanced Share Registry has a price to earnings ratio of 12.32

, based on the last twelve months. That means that at current prices, buyers pay A$12.32 for every A$1 in trailing yearly profits.

See our latest analysis for Advanced Share Registry

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 Advanced Share Registry:

P/E of 12.32 = A$0.66 ÷ A$0.054 (Based on the year to June 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying

a higher price

for each A$1 of company 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.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

Most would be impressed by Advanced Share Registry earnings growth of 11% in the last year. And it has bolstered its earnings per share by 7.2% per year over the last five years. So one might expect an above average P/E ratio.

How Does Advanced Share Registry’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Advanced Share Registry has a lower P/E than the average (13.6) in the capital markets industry classification.

ASX:ASW PE PEG Gauge January 1st 19

Its relatively low P/E ratio indicates that Advanced Share Registry shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor

director buying and selling

.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

Advanced Share Registry’s Balance Sheet

The extra options and safety that comes with Advanced Share Registry’s AU$4.3m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Bottom Line On Advanced Share Registry’s P/E Ratio

Advanced Share Registry trades on a P/E ratio of 12.3, which is below the AU market average of 14.5. Not only should the net cash position reduce risk, but the recent growth has been impressive. The below average P/E ratio suggests that market participants don’t believe the strong growth will continue.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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.’ We don’t have analyst forecasts, but you might want to assess

this data-rich visualization

of earnings, revenue and cash flow.

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.

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

[email protected]

.

View comments