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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Ever Reach Group (Holdings) Company Limited's (HKG:3616) P/E ratio to inform your assessment of the investment opportunity. What is Ever Reach Group (Holdings)'s P/E ratio? Well, based on the last twelve months it is 3.4. That is equivalent to an earnings yield of about 29%.
Check out our latest analysis for Ever Reach Group (Holdings)
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Ever Reach Group (Holdings):
P/E of 3.4 = CN¥0.81 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.24 (Based on the trailing twelve months to December 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
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. Then, a lower P/E should attract more buyers, pushing the share price up.
Ever Reach Group (Holdings) increased earnings per share by a whopping 45% last year. And it has bolstered its earnings per share by 26% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.
Does Ever Reach Group (Holdings) Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (6.6) for companies in the real estate industry is higher than Ever Reach Group (Holdings)'s P/E.
This suggests that market participants think Ever Reach Group (Holdings) will underperform other companies in its industry. 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.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).