Yahoo Finance Should We Worry About Prodigy Ventures Inc’s (CVE:PGV) P/E Ratio?
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Prodigy Ventures Inc’s (CVE:PGV) P/E ratio could help you assess the value on offer. Based on the last twelve months, Prodigy Ventures’s P/E ratio is 98.73. That corresponds to an earnings yield of approximately 1.0%.
Check out our latest analysis for Prodigy Ventures
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Prodigy Ventures:
P/E of 98.73 = CA$0.15 ÷ CA$0.0016 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each CA$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
If earnings fall then in the future the ‘E’ will be lower. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Prodigy Ventures saw earnings per share decrease by 63% last year. And EPS is down 21% a year, over the last 5 years. This might lead to muted expectations.
How Does Prodigy Ventures’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Prodigy Ventures has a significantly higher P/E than the average (20.6) P/E for companies in the it industry.
That means that the market expects Prodigy Ventures will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. 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 Prodigy Ventures’s Debt Impact Its P/E Ratio?
The extra options and safety that comes with Prodigy Ventures’s CA$1.4m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On Prodigy Ventures’s P/E Ratio
Prodigy Ventures’s P/E is 98.7 which is way above average (14.2) in the CA market. Falling earnings per share is probably keeping traditional value investors away, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don’t have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph 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 editorial-team@simplywallst.com.
