Yahoo Finance Should You Be Tempted To Sell Wi2Wi Corporation (CVE:YTY) Because Of Its P/E Ratio?
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Wi2Wi Corporation’s (CVE:YTY) P/E ratio and reflect on what it tells us about the company’s share price. Wi2Wi has a price to earnings ratio of 97.6, based on the last twelve months. That is equivalent to an earnings yield of about 1.0%.
Check out our latest analysis for Wi2Wi
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Wi2Wi:
P/E of 97.6 = $0.076 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.00078 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Growth Rates Impact P/E Ratios
If earnings fall then in the future the ‘E’ will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
Wi2Wi shrunk earnings per share by 63% over the last year. But over the longer term (5 years) earnings per share have increased by 53%. And it has shrunk its earnings per share by 99% per year over the last three years. This growth rate might warrant a low P/E ratio. This growth rate might warrant a low P/E ratio.
How Does Wi2Wi’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 Wi2Wi has a P/E ratio that is fairly close for the average for the communications industry, which is 92.6.
Its P/E ratio suggests that Wi2Wi shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Wi2Wi actually outperforms its peers going forward, that should be a positive for the share price. I inform my view byby checking management tenure and remuneration, among other things.
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Wi2Wi’s Balance Sheet
Since Wi2Wi holds net cash of US$2.0m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Wi2Wi’s P/E Ratio
Wi2Wi trades on a P/E ratio of 97.6, which is multiples above the CA market average of 15. Falling earnings per share is probably keeping traditional value investors away, but the healthy balance sheet means the company retains potential for future growth. If fails to eventuate, the current high P/E could prove to be temporary, as the share price falls.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than Wi2Wi. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
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. Thank you for reading.
