Despite its shortcomings, the P/E ratio remains one of the most widely used ratios for investors to determine the attractiveness of a stock. It is easy to compute and therefore it is very useful to assist investors in comparing the value of a stock to that of its peers or a benchmark.

Theoretically, a higher P/E ratio could mean the stock is overvalued or that investors believe that the company's earnings will rise. A lower P/E ratio indicates that the company is either undervalued or that investors expect its earnings to fall.

This article compares the current P/E ratio of local traded stocks based on the trailing 12 month (TTM) financial data to historic P/E ratios as recorded in June 2019 (article name: ‘An insight into the P/E ratio’). The list below captures local traded securities whose market cap is above €80 million.

As can be analysed most companies experienced a hike in their P/E ratios. This mainly resulted from the fact that companies’ earnings fell at a higher rate when compared with the relative share price. This is clearly demonstrated by the P/E of Malta International Airport plc, which currently stands at 126.8x.

It is important for investors to keep in mind that one of the main shortfalls of the P/E ratio, which is the historic earnings. The P/E ratio is computed on the previous 12 months data which in most cases does not reflect the future performance of a company. Particularly, in a scenario of significant volatility as is currently being experienced by the COVID-19 pandemic. Additionally, historic earnings are updated periodically, with Malta’s current minimum requirement being of once every 6 months.

In view of the limited amount of stocks listed on the local stock exchange, it is important to compare companies with international peers when analysing the P/E ratio. In line with the example given above, the majority of listed airports internationally, especially in Europe, are currently trading at price to earnings multiple of over 100x. One has to remember that the aviation industry was one of the worst hit by the coronavirus outbreak and naturally the earnings of this industry was also significantly impacted. 

Alternative metric to the P/E ratio

An alternative metric that mitigates the issue of historical earnings is the forward P/E ratio. This takes into account the projected earnings rather than this historic 12 months earnings. The biggest challenge of this metric is that its value can only be computed if one has available accurate forecast data. Unfortunately, projected financial data for local public companies is limited and only selected issuers provide more financial data than that required by the regulators.
It is important for issuers to understand that more transparency will improve investors’ confidence and sentiment. This will naturally boost up the trading activity on the local stock exchange and strengthen capital market financing. Therefore, in my opinion, local issuers stand to benefit if they improve their relationship with market participants. 

Disclaimer: This article was issued by Rowen Bonello, research analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.