There are many different ways to consider if a share price is a cheap.
Some people just look at the share price and think a $2 share price is cheaper than a $40 share price, but that’s just a function of a business’ total market capitalisation and how many shares are on issue. For example, Telstra Corporation Ltd’s (ASX: TLS) share price of $3.15 is much lower than Blackmores Limited’s (ASX: BKL) $124.75, but Telstra is the bigger business.
The most common way to compare shares whilst accounting for the share price and market capitalisation differences is the price/earnings ratio. The lower the p/e ratio the better because you’re paying less for the same amount of earnings.
Just because something has a low p/e ratio doesn’t mean it’s a great buy, sometimes a really low p/e ratio can be because the next reported earnings are likely to drop.
It’s important to choose shares that are growing their profit, even if it’s just a little each year. Here are two shares that have a low p/e but are growing:
Paragon Care Ltd (ASX: PGC)
Paragon is trading at 13x FY18’s estimated earnings. Paragon is a small cap healthcare provider that has steadily acquired other medical businesses, it is now a reasonably large provider of medical equipment, devices and consumables.
I believe it’s trading with a low price/earnings ratio because investors are uncertain about the roll-up strategy, but in the long-term it should achieve growing economies of scale as it supplies more products to hospitals and aged care facilities due to Australia’s ageing population.
Greencross Limited (ASX: GXL)
Greencross is trading at 13x FY18’s estimated earnings. Greencross is the leading pet company in Australia with its Petbarn retail chain and Greencross vet network.
The market has turned negative about Greencross over the past couple of years, particularly because investors are afraid Amazon could hurt the retail margins of Petbarn. However, Greencross is continuing to grow for now so perhaps the negativity is an opportunity.
One problem with the p/e ratio is that it looks at the historical earnings, high-growth companies can look expensive in the short-term but they may be cheap if you look ahead a few years.
These top stocks are all trading with very attractive price/earning ratios for their growth.
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Motley Fool contributor Tristan Harrison owns shares of Greencross Limited. The Motley Fool Australia owns shares of and has recommended Blackmores Limited, Greencross Limited, and Telstra Limited. The Motley Fool Australia has recommended Paragon Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.