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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use K. Wah International Holdings Limited's (HKG:173) P/E ratio to inform your assessment of the investment opportunity. K. Wah International Holdings has a price to earnings ratio of 3.81, based on the last twelve months. That means that at current prices, buyers pay HK$3.81 for every HK$1 in trailing yearly profits.
View our latest analysis for K. Wah International Holdings
How Do You Calculate K. Wah International Holdings's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for K. Wah International Holdings:
P/E of 3.81 = HK$4.94 ÷ HK$1.3 (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. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
K. Wah International Holdings maintained roughly steady earnings over the last twelve months. But EPS is up 16% over the last 5 years.
How Does K. Wah International 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. The image below shows that K. Wah International Holdings has a lower P/E than the average (6.5) P/E for companies in the real estate industry.
This suggests that market participants think K. Wah International Holdings will underperform other companies in its industry. Since the market seems unimpressed with K. Wah International Holdings, 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. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.