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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Asiasec Properties Limited’s (HKG:271) P/E ratio could help you assess the value on offer. Based on the last twelve months, Asiasec Properties’s P/E ratio is 29.1. That means that at current prices, buyers pay HK$29.1 for every HK$1 in trailing yearly profits.
Check out our latest analysis for Asiasec Properties
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Asiasec Properties:
P/E of 29.1 = HK$3.09 ÷ HK$0.11 (Based on the year to June 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 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
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Asiasec Properties’s earnings per share fell by 30% in the last twelve months. And it has shrunk its earnings per share by 24% per year over the last five years. This growth rate might warrant a below average P/E ratio.
How Does Asiasec Properties’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (5.7) for companies in the real estate industry is a lot lower than Asiasec Properties’s P/E.
Its relatively high P/E ratio indicates that Asiasec Properties shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.