The humble price-to-earnings (P/E) ratio is also known as the earnings multiple. Value investors swear by it, speculators trash it. Truthfully, the earnings multiple doesn't necessarily define whether an investment is a buy or not. It is simply another tool in the arsenal of an investor.
Over the long term, it is typical that a company's earnings multiple trends towards the market average. For relevance, the S&P/ASX 200 Index (ASX: XJO)'s P/E ratio is 22.96 according to Blackrock.
But today we'll take a look at a handful of ASX shares that are trading on sky-high P/E ratios.
4 ASX shares with lofty P/E ratios
REA Group Limited (ASX: REA)
You have likely used a service of REA Group before, either when house hunting (realestate.com.au) or looking for a new housemate (flatmates.com.au). The online real estate advertising company currently boasts a daily audience of 1.9 million people, up 61% from a year ago.
At the moment, REA Group trades on a staggering earnings multiple of 175x. This is significantly higher than the interactive media and services industry average of 36.9x.
This begs the question, why is REA trading on such a rich P/E ratio compared to others in the industry? Earnings per share actually fell by 9% in REA Group's last posted full-year results, dampened by the impacts of COVID-19.
Potentially investors are placing significant value on the growth in eyeballs to the platform, which can translate to additional monetisation. Average monthly traffic on the Australian realestate.com.au page increased by 18% to 90 million for FY2020. In addition, June saw the platform pull a record 114.3 million views – 3.2 times the traffic of its nearest competitor.
REA Group has also been undertaking a rapid growth strategy in Asia, America, and India. This has mostly been facilitated through acquisitions in what are newly developing markets for the company.
Pro Medicus Limited (ASX: PME)
Pro Medicus offers a suite of health imaging software solutions to hospitals, imaging centres, and healthcare groups. Since 2014, the company has been growing annual earnings at a blistering pace of 34.8% historically.
Currently the shares are trading on a P/E ratio of 154x. This is 2.48 times more than the healthcare services industry average of 63.8x.
The company reported double-digit growth in revenue, earnings, and cash reserves in its FY2020 results back in October. Chairman Peter Kempen described the result:
The success of the company, despite the challenge of COVID-19, has been due to the quality of the management team, the resilience of all of our staff, the flexibility of our leading-edge technology and the robustness of our business model.
The company believes its operating leverage is in its highly scalable offering, due to its product being purely software-based. As noted in the presentation, management expects this will enable a contained cost base, which will result in margin growth as the business expands.
Pro Medicus is currently paying a dividend of 12 cents per share, an increase of 14.3% from last year.
The company has signed several deals over the last few months alone, including a 5 year contract with MedStar Health, a renewal with Zwanger-Persiri, and a 7 year contract with Ludwig-Maximilians University.
Xero Limited (ASX: XRO)
The well-known cloud-based accounting software provider has grown to become a global entity. Xero provides its solutions in the United Kingdom, North America, Singapore, and of course, across Australia and New Zealand.
The Xero share price at the time of writing is commanding an unbelievable earnings multiple of 625x. Keep in mind that the company only turned to profitability in late 2019.
Taking a look at Xero's investor presentation for the first half of FY2021, the company managed to grow despite the challenging conditions. Earnings before interest, tax, depreciation and amortisation (EBITDA) leapt 86% to $120.8 million. Likewise, free cash flow increased by 49.4% to $54.3 million from $4.8 million in the prior corresponding period.
One of Xero's strategic priorities is to continue to harness the benefits of scalability, while driving its cloud accounting platform.
Nanosonics Ltd (ASX: NAN)
Nanosonics is an Australian infection prevention company that offers an automated disinfection technology known as Trophon. This product delivers a modern means of disinfecting ultrasound probes.
At present, Nanosonics' P/E ratio is a massive 243.9x. This is in contrast to the average 41.2x multiple for the broader medical equipment industry.
It seems the potential for this company to disrupt an arguably stagnant disinfection industry has investors excited. Although Nanosonics' operating profit after tax fell for FY2020, down 25% to $10.137 million, revenue continues to grow. In its 2020 annual report, Nanosonics reported that company revenue rose 18.65% to just over $100 million.
Nanosonics continued to increase its investment in R&D by 37% to $15.6 million in FY2020. This was a part of the company's strategy to expand its product portfolio and open up future opportunities. Shareholders will be watching attentively to see if any new innovations are sprout from these investments over the coming years.
