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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Pico Far East Holdings Limited's (HKG:752) P/E ratio to inform your assessment of the investment opportunity. Pico Far East Holdings has a price to earnings ratio of 12.19, based on the last twelve months. That is equivalent to an earnings yield of about 8.2%.
See our latest analysis for Pico Far East 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 Pico Far East Holdings:
P/E of 12.19 = HK$2.63 ÷ HK$0.22 (Based on the year to April 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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 Does Pico Far East Holdings'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 Pico Far East Holdings has a lower P/E than the average (17.2) in the media industry classification.
Its relatively low P/E ratio indicates that Pico Far East Holdings shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. 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. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Pico Far East Holdings shrunk earnings per share by 7.0% last year. But it has grown its earnings per share by 5.1% per year over the last five years. And it has shrunk its earnings per share by 3.6% per year over the last three years. This growth rate might warrant a low P/E ratio. So it would be surprising to see a high P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.