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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 Lai Sun Development Company Limited’s (HKG:488) P/E ratio to inform your assessment of the investment opportunity. Lai Sun Development has a price to earnings ratio of 1.77, based on the last twelve months. That corresponds to an earnings yield of approximately 57%.
View our latest analysis for Lai Sun Development
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Lai Sun Development:
P/E of 1.77 = HK$12.64 ÷ HK$7.16 (Based on the trailing twelve months to July 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. 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. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Notably, Lai Sun Development grew EPS by a whopping 107% in the last year. And it has improved its earnings per share by 8.6% per year over the last three years. So we’d generally expect it to have a relatively high P/E ratio. But earnings per share are down 1.0% per year over the last five years.
How Does Lai Sun Development’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 Lai Sun Development has a lower P/E than the average (5.2) in the real estate industry classification.
Lai Sun Development’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.