In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Redco Properties Group Limited's (HKG:1622) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Redco Properties Group has a P/E ratio of 9.53. That is equivalent to an earnings yield of about 10%.
Check out our latest analysis for Redco Properties Group
How Do You Calculate Redco Properties Group'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 Redco Properties Group:
P/E of 9.53 = CN¥2.66 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.28 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
It's great to see that Redco Properties Group grew EPS by 15% in the last year. And its annual EPS growth rate over 5 years is 11%. With that performance, you might expect an above average P/E ratio.
Does Redco Properties Group Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. As you can see below, Redco Properties Group has a higher P/E than the average company (6.5) in the real estate industry.
That means that the market expects Redco Properties Group will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.