In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Eagle Nice (International) Holdings Limited’s (HKG:2368) P/E ratio and reflect on what it tells us about the company’s share price. Eagle Nice (International) Holdings has a P/E ratio of 8.49, based on the last twelve months. That means that at current prices, buyers pay HK$8.49 for every HK$1 in trailing yearly profits.
See our latest analysis for Eagle Nice (International) Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Eagle Nice (International) Holdings:
P/E of 8.49 = HK$2.95 ÷ HK$0.35 (Based on the year to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Eagle Nice (International) Holdings shrunk earnings per share by 9.5% last year. But EPS is up 30% over the last 5 years.
How Does Eagle Nice (International) Holdings’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Eagle Nice (International) Holdings has a lower P/E than the average (10.6) in the luxury industry classification.
Its relatively low P/E ratio indicates that Eagle Nice (International) Holdings shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Eagle Nice (International) Holdings, it’s quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.