In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Wharf Real Estate Investment Company Limited’s (HKG:1997) P/E ratio and reflect on what it tells us about the company’s share price. Wharf Real Estate Investment has a P/E ratio of 6.69, based on the last twelve months. That corresponds to an earnings yield of approximately 15%.
Check out our latest analysis for Wharf Real Estate Investment
How Do You Calculate Wharf Real Estate Investment’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Wharf Real Estate Investment:
P/E of 6.69 = HK$49.6 ÷ HK$7.41 (Based on the year to June 2018.)
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 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 even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It’s nice to see that Wharf Real Estate Investment grew EPS by a stonking 117% in the last year.
How Does Wharf Real Estate Investment’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (5.3) for companies in the real estate industry is lower than Wharf Real Estate Investment’s P/E.
Its relatively high P/E ratio indicates that Wharf Real Estate Investment shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. 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. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.
Wharf Real Estate Investment’s Balance Sheet
Wharf Real Estate Investment has net debt worth 27% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.