In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Midea Real Estate Holding Limited's (HKG:3990) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Midea Real Estate Holding has a P/E ratio of 5.79. In other words, at today's prices, investors are paying HK$5.79 for every HK$1 in prior year profit.
Check out our latest analysis for Midea Real Estate Holding
How Do You Calculate Midea Real Estate Holding's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Midea Real Estate Holding:
P/E of 5.79 = HK$17.85 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$3 (Based on the trailing twelve months to June 2019.)
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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does Midea Real Estate Holding'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 Midea Real Estate Holding has a P/E ratio that is roughly in line with the real estate industry average (6.1).
Midea Real Estate Holding's P/E tells us that market participants think its prospects are roughly in line with its industry. The company could surprise by performing better than average, in the future. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Midea Real Estate Holding's earnings per share grew by -9.1% in the last twelve months. And it has bolstered its earnings per share by 43% per year over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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.