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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how Shirble Department Store Holdings (China) Limited's (HKG:312) P/E ratio could help you assess the value on offer. Shirble Department Store Holdings (China) has a price to earnings ratio of 26.45, based on the last twelve months. That corresponds to an earnings yield of approximately 3.8%.
View our latest analysis for Shirble Department Store Holdings (China)
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Shirble Department Store Holdings (China):
P/E of 26.45 = CN¥1.17 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.044 (Based on the year to December 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Shirble Department Store Holdings (China)'s 140% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. And earnings per share have improved by 30% annually, over the last three years. So we'd absolutely expect it to have a relatively high P/E ratio.
How Does Shirble Department Store Holdings (China)'s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Shirble Department Store Holdings (China) has a higher P/E than the average (13.7) P/E for companies in the multiline retail industry.
Its relatively high P/E ratio indicates that Shirble Department Store Holdings (China) 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 always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).