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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Excalibur Global Financial Holdings Limited's (HKG:8350) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Excalibur Global Financial Holdings has a P/E ratio of 9.15. That corresponds to an earnings yield of approximately 11%.
View our latest analysis for Excalibur Global Financial Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Excalibur Global Financial Holdings:
P/E of 9.15 = HK$0.23 ÷ HK$0.025 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Excalibur Global Financial Holdings's 423% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. Unfortunately, earnings per share are down 68% a year, over 5 years.
How Does Excalibur Global Financial Holdings's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Excalibur Global Financial Holdings has a lower P/E than the average (16.5) P/E for companies in the capital markets industry.
This suggests that market participants think Excalibur Global Financial Holdings will underperform other companies in its industry. Since the market seems unimpressed with Excalibur Global Financial Holdings, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.