23 Dec Ofer Eitan Convey: Here’s What Tofu Restaurant Co., Ltd’s (GTSM:2752) P/E Rati…
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll apply a basic P/E ratio analysis to Tofu Restaurant Co., Ltd’s (GTSM:2752), to help you decide if the stock is worth further research. What is Tofu Restaurant’s P/E ratio? Well, based on the last twelve months it is 16.19. In other words, at today’s prices, investors are paying NT$16.19 for every NT$1 in prior year profit.
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 Tofu Restaurant:
P/E of 16.19 = NT$111.50 ÷ NT$6.88 (Based on the year to September 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each NT$1 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 Tofu Restaurant’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Tofu Restaurant has a lower P/E than the average (18.9) P/E for companies in the hospitality industry.
Its relatively low P/E ratio indicates that Tofu Restaurant 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. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
Tofu Restaurant’s earnings per share grew by -6.2% in the last twelve months. Unfortunately, earnings per share are down 15% a year, over 5 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. 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.
How Does Tofu Restaurant’s Debt Impact Its P/E Ratio?
With net cash of NT$687m, Tofu Restaurant has a very strong balance sheet, which may be important for its business. Having said that, at 29% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Bottom Line On Tofu Restaurant’s P/E Ratio
Tofu Restaurant’s P/E is 16.2 which is about average (16.7) in the TW market. EPS was up modestly better over the last twelve months. And the healthy balance sheet means the company can sustain growth. But the P/E suggests shareholders have some doubts.
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 [email protected]. 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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