In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Wong's Kong King International (Holdings) Limited's (HKG:532) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Wong's Kong King International (Holdings)'s P/E ratio is 8.52. In other words, at today's prices, investors are paying HK$8.52 for every HK$1 in prior year profit.
View our latest analysis for Wong's Kong King International (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 Wong's Kong King International (Holdings):
P/E of 8.52 = HK$0.85 ÷ HK$0.10 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company 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.
Does Wong's Kong King International (Holdings) 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. The image below shows that Wong's Kong King International (Holdings) has a P/E ratio that is roughly in line with the electronic industry average (8.4).
Its P/E ratio suggests that Wong's Kong King International (Holdings) shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
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. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Wong's Kong King International (Holdings)'s earnings per share fell by 40% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 3.2%.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).