In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Kwoon Chung Bus Holdings Limited’s (HKG:306) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Kwoon Chung Bus Holdings’s P/E ratio is 10.92. That means that at current prices, buyers pay HK$10.92 for every HK$1 in trailing yearly profits.
See our latest analysis for Kwoon Chung Bus Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Kwoon Chung Bus Holdings:
P/E of 10.92 = HK$4.76 ÷ HK$0.44 (Based on the trailing twelve months to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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
When earnings fall, the ‘E’ decreases, over time. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Kwoon Chung Bus Holdings’s earnings per share fell by 25% in the last twelve months. But it has grown its earnings per share by 6.2% per year over the last five years. And EPS is down 17% a year, over the last 3 years. This could justify a low P/E.
How Does Kwoon Chung Bus Holdings’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Kwoon Chung Bus Holdings has a lower P/E than the average (14.9) in the transportation industry classification.
Its relatively low P/E ratio indicates that Kwoon Chung Bus Holdings shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. 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
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.