In This Article:
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Wing Lee Property Investments Limited's (HKG:864) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Wing Lee Property Investments has a P/E ratio of 13.9. That means that at current prices, buyers pay HK$13.9 for every HK$1 in trailing yearly profits.
Check out our latest analysis for Wing Lee Property Investments
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Wing Lee Property Investments:
P/E of 13.9 = HK$0.70 ÷ HK$0.050 (Based on the trailing twelve months 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. 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.
Does Wing Lee Property Investments Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Wing Lee Property Investments has a higher P/E than the average company (6.4) in the real estate industry.
Its relatively high P/E ratio indicates that Wing Lee Property Investments shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Wing Lee Property Investments shrunk earnings per share by 61% over the last year. And over the longer term (5 years) earnings per share have decreased 14% annually. This might lead to muted expectations.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. 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.