This words with the second letter karticle 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 HKR International Limited’s (
HKG:480
) P/E ratio could help you assess the value on offer. Based on the last twelve months,
HKR International’s P/E ratio is 2.14
. In other words, at today’s prices, investors are paying HK$2.14 for every HK$1 in prior year profit.
View our latest analysis for HKR International
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 HKR International:
P/E of 2.14 = HK$3.69 ÷ HK$1.73 (Based on the year to September 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.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the ‘E’ will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
It’s nice to see that HKR International grew EPS by a stonking 162% in the last year. And it has bolstered its earnings per share by 20% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.
How Does HKR International’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see HKR International has a lower P/E than the average (5.3) in the real estate industry classification.
SEHK:480 PE PEG Gauge January 1st 19
This suggests that market participants think HKR International will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor
director buying and selling
.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
How Does HKR International’s Debt Impact Its P/E Ratio?
HKR International has net debt worth 79% of its market capitalization. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.
The Bottom Line On HKR International’s P/E Ratio
HKR International’s P/E is 2.1 which is below average (10.4) in the HK market. The company may have significant debt, but EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified.
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ We don’t have analyst forecasts, but you might want to assess
this data-rich visualization
of earnings, revenue and cash flow.
You might be able to find a better buy than HKR International. If you want a selection of possible winners, check out this
free
list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at
.
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