Why Swire Properties Limited's (HKG:1972) High P/E Ratio Isn't Necessarily A Bad Thing

Simply Wall St

Fri, Jul 12, 2019, 6:17 PM

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 Swire Properties Limited's (HKG:1972) P/E ratio could help you assess the value on offer. Swire Properties has a price to earnings ratio of 6.56, based on the last twelve months. In other words, at today's prices, investors are paying HK$6.56 for every HK$1 in prior year profit.

Check out our latest analysis for Swire Properties

How Do You Calculate Swire Properties's P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Swire Properties:

P/E of 6.56 = HK$32.15 ÷ HK$4.9 (Based on the year to December 2018.)

Is A High P/E 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 Does Swire Properties's P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Swire Properties has a P/E ratio that is roughly in line with the real estate industry average (6.4).

SEHK:1972 Price Estimation Relative to Market, July 13th 2019

That indicates that the market expects Swire Properties will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.

Swire Properties shrunk earnings per share by 16% over the last year. But over the longer term (5 years) earnings per share have increased by 18%.

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

The 'Price' in P/E reflects the market capitalization of the company. 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.