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 Fullwealth Construction Holdings Company Limited's (HKG:1034) P/E ratio to inform your assessment of the investment opportunity. Fullwealth Construction Holdings has a price to earnings ratio of 28.01, based on the last twelve months. That corresponds to an earnings yield of approximately 3.6%.
Check out our latest analysis for Fullwealth Construction Holdings
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Fullwealth Construction Holdings:
P/E of 28.01 = HK$0.27 ÷ HK$0.0096 (Based on the year to December 2018.)
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 Fullwealth Construction Holdings's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Fullwealth Construction Holdings has a much higher P/E than the average company (9.3) in the construction industry.
Fullwealth Construction Holdings's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Fullwealth Construction Holdings saw earnings per share decrease by 75% last year.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.