28 March - 3 April 2001

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Valuing shares – p/e ratios provide helpful clues

One of the most common problems faced by investors is, obviously, when to buy, sell or when sit on an investment. Indeed, the very thought of it all can send the investor of average knowledge into a state of perplexity.

The price-earnings (p/e) ratio is the most popular means of valuing individual shares to determine whether they are actually worth buying while hinting at what the investor's cut at the end the fiscal year will look like.

The p/e ratio of an equity shows the value of a company through its stock market listing, compared through division with how much revenue it actually intakes through selling its goods or services.

For example, if the total value of an equity's shares are Lm1,000,000 in market value, while the firm made a profit of Lm100,000 – its p/e ration would be of 10.

Companies in new industries, particularly those in the so-called ‘new economy,' with fast growing profits - such as those in IT sectors – tend to have relatively high p/e ratios.

However, older and more traditional brick and mortar firms, in which there is a distinctly smaller chance of rapid profit growth, such and construction companies, have comparatively low p/e ratios.

The trick, according to experts, is to search for anomalies, such as companies that have promising prospects but are undervalued compared with the average.

The average p/e ration for equities on the normal equities list of the Malta Stock Exchange stands at some 34.66. The sum places Simonds Farson's Cisk, Plaza Centres and Suncrest Hotels above average, with respective p/e ratios of 54.722, 58.615 and 67.286.

However, the sum, likewise, places Bank of Valletta, HSBC, Lombard, Maltacom and Middle Sea Insurance below average with their respective p/e ratios of 13.028, 18.518, 19.624, 21.489 and 23.992.

However, it must be noted that, on the Malta Stock Exchange, a trend appears in that those equities holding lower average prices, such as Suncrest Hotels and Simonds Farson's Cisk, accordingly benefit from higher p/e ratios, while those with higher average prices, such as HSBC and Bank of Valletta are subject to lower p/e ratios.

The Business Times, Network House, Vjal ir-Rihan San Gwann SGN 07
Tel: (356) 382741-3, 382745-6 | Fax: (356) 385075 | e-mail: editorial@networkpublications.com.mt