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 Kwoon Chung Bus Holdings Limited's (HKG:306) P/E ratio to inform your assessment of the investment opportunity. Kwoon Chung Bus Holdings has a P/E ratio of 5.95, based on the last twelve months. In other words, at today's prices, investors are paying HK$5.95 for every HK$1 in prior year profit.
View 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 5.95 = HK$2.70 ÷ HK$0.45 (Based on the trailing twelve months to September 2019.)
Is A High Price-to-Earnings 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 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 Does Kwoon Chung Bus 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 Kwoon Chung Bus Holdings has a lower P/E than the average (19.7) P/E for companies in the transportation industry.
This suggests that market participants think Kwoon Chung Bus Holdings will underperform other companies in its industry. Since the market seems unimpressed with Kwoon Chung Bus 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.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
Kwoon Chung Bus Holdings saw earnings per share improve by -4.1% last year. And it has bolstered its earnings per share by 2.4% per year over the last five years. But earnings per share are down 17% per year over the last three years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. 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.