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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how Henderson Land Development Company Limited's (HKG:12) P/E ratio could help you assess the value on offer. Henderson Land Development has a P/E ratio of 7.07, based on the last twelve months. That means that at current prices, buyers pay HK$7.07 for every HK$1 in trailing yearly profits.
View our latest analysis for Henderson Land Development
How Do You Calculate Henderson Land Development's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Henderson Land Development:
P/E of 7.07 = HK$50.05 ÷ HK$7.08 (Based on the trailing twelve months to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Henderson Land Development's earnings per share grew by -2.4% in the last twelve months. And earnings per share have improved by 16% annually, over the last five years.
How Does Henderson Land Development's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Henderson Land Development has a P/E ratio that is roughly in line with the real estate industry average (6.7).
Henderson Land Development's P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).