In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Convenience Retail Asia Limited’s (HKG:831) P/E ratio could help you assess the value on offer. Based on the last twelve months, Convenience Retail Asia’s P/E ratio is 16.23. That corresponds to an earnings yield of approximately 6.2%.
View our latest analysis for Convenience Retail Asia
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Convenience Retail Asia:
P/E of 16.23 = HK$3.9 ÷ HK$0.24 (Based on the year to December 2018.)
Is A High P/E 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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Most would be impressed by Convenience Retail Asia earnings growth of 22% in the last year. And it has bolstered its earnings per share by 2.9% per year over the last five years. This could arguably justify a relatively high P/E ratio.
How Does Convenience Retail Asia’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (19.5) for companies in the consumer retailing industry is higher than Convenience Retail Asia’s P/E.
This suggests that market participants think Convenience Retail Asia will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
Remember: P/E Ratios Don’t Consider The Balance Sheet
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.