Is Sino-Ocean Group Holding Limited's (HKG:3377) P/E Ratio Really That Good?

Simply Wall St

Tue, May 28, 2019, 6:02 PM

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 Sino-Ocean Group Holding Limited's (HKG:3377) P/E ratio to inform your assessment of the investment opportunity. What is Sino-Ocean Group Holding's P/E ratio? Well, based on the last twelve months it is 5.72. That means that at current prices, buyers pay HK$5.72 for every HK$1 in trailing yearly profits.

See our latest analysis for Sino-Ocean Group Holding

How Do You Calculate Sino-Ocean Group Holding's P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

Or for Sino-Ocean Group Holding:

P/E of 5.72 = CN¥2.71 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.47 (Based on the year to December 2018.)

Is A High Price-to-Earnings 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. 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.

Sino-Ocean Group Holding saw earnings per share decrease by 30% last year. But EPS is up 19% over the last 3 years. And over the longer term (5 years) earnings per share have decreased 4.4% annually. This might lead to muted expectations.

Does Sino-Ocean Group Holding Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. As you can see below Sino-Ocean Group Holding has a P/E ratio that is fairly close for the average for the real estate industry, which is 6.1.

SEHK:3377 Price Estimation Relative to Market, May 29th 2019

That indicates that the market expects Sino-Ocean Group Holding will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. I inform my view byby checking management tenure and remuneration, among other things.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.