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 S E A Holdings Limited's (HKG:251) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, S E A Holdings has a P/E ratio of 33.98. In other words, at today's prices, investors are paying HK$33.98 for every HK$1 in prior year profit.

See our latest analysis for S E A Holdings

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for S E A Holdings:

P/E of 33.98 = HKD6.80 ÷ HKD0.20 (Based on the trailing twelve months 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 HKD1 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 S E A Holdings's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. As you can see below, S E A Holdings has a much higher P/E than the average company (6.6) in the real estate industry.

S E A Holdings's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

It's nice to see that S E A Holdings grew EPS by a stonking 44% in the last year. Unfortunately, earnings per share are down 24% a year, over 5 years.

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. 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.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.