This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Hang Lung Group Limited’s (HKG:10) P/E ratio and reflect on what it tells us about the company’s share price. Hang Lung Group has a P/E ratio of 4.86, based on the last twelve months. That is equivalent to an earnings yield of about 21%.
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How Do I Calculate Hang Lung Group’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Hang Lung Group:
P/E of 4.86 = HK$21.25 ÷ HK$4.37 (Based on the trailing twelve months to June 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. Earnings growth means that in the future the ‘E’ will be higher. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Notably, Hang Lung Group grew EPS by a whopping 38% in the last year. And it has improved its earnings per share by 7.7% per year over the last three years. With that performance, I would expect it to have an above average P/E ratio. But earnings per share are down 2.1% per year over the last five years.
How Does Hang Lung Group’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (5.5) for companies in the real estate industry is higher than Hang Lung Group’s P/E.
Hang Lung Group’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Hang Lung Group, 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
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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).