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 Sino Land Company Limited's (HKG:83) P/E ratio could help you assess the value on offer. Sino Land has a price to earnings ratio of 11.46, based on the last twelve months. That means that at current prices, buyers pay HK$11.46 for every HK$1 in trailing yearly profits.
View our latest analysis for Sino Land
How Do You Calculate Sino Land's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Sino Land:
P/E of 11.46 = HK$11.82 ÷ HK$1.03 (Based on the year to June 2019.)
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.
Does Sino Land 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 Sino Land has a higher P/E than the average (6.1) P/E for companies in the real estate industry.
That means that the market expects Sino Land will outperform other companies in its industry. 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.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Sino Land shrunk earnings per share by 53% over the last year. And EPS is down 7.1% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
So What Does Sino Land's Balance Sheet Tell Us?
With net cash of HK$34b, Sino Land has a very strong balance sheet, which may be important for its business. Having said that, at 42% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.