Price Earning Ratio:
A rolling PE is the current stock price divided by the total earning per share of the rolling 4 quarters. If a company's PE is 10 times, it means that the current stock price is actually 10 times of its earning. Provided that the company earning remains unchanged, the company will earn the invested capital of investor in 10 years (cost).
Leading PE:
Leading PE is a different way of calculating PE, instead of rolling last 4 quarters, Leading PE uses the current stock price and divided by the annualized the current financial years' total earning per share.
Here is a comparison of normal PE and Leading PE:
| 05'Q4 | 06'Q1 | 06'Q2 | 06'Q3 | Current Price | |||
| Earning Per Share | -10sen | 5sen | 5sen | 5sen | RM 1 | PE | 20times |
| Earning Per Share | -10sen | 5sen | 5sen | 5sen | RM 1 | Leading PE | 5 time |
Table 1: Comparison of PE and Leading PE.
Calculating PE:
Current stock price (RM1）÷ 4 Rolling quarters Earning Per Share ( -10sen + 5sen + 5sen + 5sen）= 20times.
Calculating Leading PE:
Current stock price (RM1）÷ [Current Financial Year's Earning + Annualized Earning Per Share ( Q1 5 sen Q2 5sen + Q3 5sen ) ÷3 ] = 5 times
From table 1, we can see that Leading PE reflects the latest company's performance, and if investors could combine both normal PE with Leading PE, he or she can see if the company is actually doing better in the current financial year. Thus knowing if the current stock price is relatively expensive or reasonable.
FBMKLCI PE and Market PE:
The FBMKLCI PE is an average PE of the 30 component stocks in by weightage their market capital, which reflects the relatively price level of the KLCI, while the Market PE is an average weightage of all counters listed by their market capital.
Generally, a healthy market PE is usually around 16 to 18 times, and during a bull run, market PE can be as high as 20 times. Currently, as at 10/09/2009, our market PE is around 21.37 times, and therefore, the price of the KLCI seems relatively higher. Of course, this is due to the bull run since April.
Despite many companies had announced better quarter result, the KLCI PE remains high because of the continuous rising of heavy weighted blue chip counters. This suggests that after breaking the 200-MA, the KLCI has been moving higher. Nevertheless, there are still some counters with a relatively lower PE, and investors will have to find these counters with lower PE and high dividend yield.
Stock with Lower PE does not totally mean cheap:
It may seem like stock with lower PE is generally cheaper, but it is not entirely true. Since PE is calculated with the relative of price and earning per share, and if the company's earning remain unchanged but its stock price is falling continuously, its PE will be lower. If investors are picking this stock at a lower PE level, it is likely that he might picked up this stock in a downtrend. In other words, when stock PE is low, it is important to study the trend, and we should avoid picking stocks during a downtrend.
A conservative approach in investing should choose stocks with lower PE, while waiting for the right timing by following technical analysis signals. This is to ensure that the stock picked is not too 'expensive' and yet, buying at the right trend. As for aggressive investors may not need to follow this method, for some times, some counters still have upside potential, despite their high PE.
Counters that has PE lower than the Market PE:
PBBANK- 1295
Chart 1: Public Bank chart from 21/05/09- 10/09/09.
Major Shareholders:
1 EMPLOYEES PROVIDENT FUND BOARD 430,013,864 shares （12.81% ）
2 SEKURITI PEJAL SB 103,724,186 shares （3.09% ）
3 SEKURITI PEJAL SB 97,670,500 shares （2.91% ）
4 KEPUNYAAN CHINTAMANI SB 67,919,531 shares （2.02% ）
5 CONSOLIDATED TEH HOLDINGS SB 58,770,687 shares （1.75% ）
Latest Quarterly Financial Result as at 30/6/2009：
| PER | 13.89 times | Dividend Yield | 5.48% |
| Dividend | Dividend Yield | Net ProRatio | |
| 31/12/2008 | 55 sen | 6.29% | 24.58% |
| 31/12/2007 | 75 sen | 6.82% | 22.22% |
| 31/12/2006 | 60 sen | 7.69% | 22.89% |
| 31/12/2005 | 55 sen | 8.66% | 24.50% |
| 31/12/2004 | 90 sen | 12.68% | 25.11% |
BJTOTO 1562
Chart 2: Bjtoto, chart from 21/05/09- 10/09/09.
Major Shareholders:
1 HSBC NOM-EX AN-HSBC (M) TRUSTEE BHD 268,348,624 shares（21.37% ）
2 DB (M) (AS)-DEUTSCHE BANK AG LONDON 54,731,000 shares（4.36% ）
3 CIMSEC NOM PL SEC-VINCENT TAN CHEE YIOUN 50,372,550 shares（4.01% ）
4 CITIGROUP NOM (AS)-GOLDMAN SACHS INTL 39,278,400 shares（3.13% ）
5 CIMB GROUP NOM-BERJAYA LAND-B L CAPITAL SB 31,800,000 shares（2.53% ）
Latest Quarterly Financial Result as at 30/4/2009：
| PER | 13.21 times | Dividend Yield | 5.84% |
| Dividend | Dividend Yield | Net ProRatio | |
| 30/04/2009 | 25.21 sen | 5.06% | 11.11% |
| 30/04/2008 | 25.90 sen | 5.26% | 10.64% |
| 30/04/2007 | 32.74 sen | 7.31% | 12.41% |
| 30/04/2006 | 25.50 sen | 5.23% | 15.81% |
| 30/04/2005 | 45 sen | 11.08% | 12.29% |
| 30/04/2004 | 28 sen | 6.39% | 5.57% |
GAB 3255
Chart 3: GAB chart from 21/05/09- 10/09/09.
Major Shareholders:
1. GAPL PL 154,069,900 shares（51.00% ）
2. MALAYSIA NOM-GREAT EASTERN LIFE ASSURANCE (M) BHD 10,217,480 shares（3.38% ）
3. HSBC (AS)-BNP PARIBAS SEC SVCES LUX-ABERDEEN GLOBAL 6,750,500 shares（2.23% ）
4. STATE STREET LONDON FUND XCP2-ABERDEEN ASIAN INC FUND LTD 3,700,000 shares（1.23% ）
5. MALAYSIA NOM-GREAT EASTERN LIFE ASSURANCE (M) BHD 2,301,320 shares（0.76% ）
Latest Quarterly Financial Result as at 30/6/2009：
| PER | 14.68 times | Dividend Yield | 6.07% |
| Dividend | Dividend Yield | Net ProRatio | |
| 30/06/2009 | 41 sen | 6.27% | 11.05% |
| 30/06/2008 | 44 sen | 8.46% | 10.54% |
| 30/06/2007 | 45 sen | 7.63% | 10.50% |
| 30/06/2006 | 42 sen | 7.71% | 13.13% |
| 30/06/2005 | 41 sen | 7.26% | 11.34% |
| 30/06/2004 | 38 sen | 7.98% | 11.11% |
Above are some examples of counters with lower PE than the the market PE with high dividend yield.
Conclusion:
PE is one of the important financial ratio; it helps investors to avoid stocks that is relatively too expensive and find out some counters at a reasonable price. However, investors should never buy stock only based on lower PE, for he might have bought the stocks in its downtrend. Therefore, ideally, investors should pick stock with lower PE, and study its price trend, and only buy when technical analysis gives buy signals.
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