In This Article:
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 Logan Property Holdings Company Limited’s (HKG:3380) P/E ratio could help you assess the value on offer. Logan Property Holdings has a price to earnings ratio of 6.72, based on the last twelve months. That means that at current prices, buyers pay HK$6.72 for every HK$1 in trailing yearly profits.
Check out our latest analysis for Logan Property Holdings
How Do You Calculate Logan Property Holdings’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Logan Property Holdings:
P/E of 6.72 = CN¥7.81 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥1.16 (Based on the trailing twelve months to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Logan Property Holdings saw earnings per share decrease by 3.2% last year. But it has grown its earnings per share by 24% per year over the last five years.
How Does Logan Property Holdings’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Logan Property Holdings has a higher P/E than the average company (5.2) in the real estate industry.
Logan Property Holdings’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. 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).