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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Kam Hing International Holdings Limited's (HKG:2307) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Kam Hing International Holdings has a P/E ratio of 7.17. That corresponds to an earnings yield of approximately 14%.
View our latest analysis for Kam Hing International Holdings
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Kam Hing International Holdings:
P/E of 7.17 = HK$0.60 ÷ HK$0.084 (Based on the trailing twelve months to December 2018.)
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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Kam Hing International Holdings increased earnings per share by an impressive 13% over the last twelve months. And its annual EPS growth rate over 3 years is 7.7%. So one might expect an above average P/E ratio. But earnings per share are down 4.5% per year over the last five years.
Does Kam Hing International 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. If you look at the image below, you can see Kam Hing International Holdings has a lower P/E than the average (10.7) in the luxury industry classification.
Kam Hing International Holdings'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. You should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.