What Does FIT Hon Teng Limited’s (HKG:6088) P/E Ratio Tell You?

Kayla Ward

Wed, Feb 6, 2019, 8:38 PM

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 FIT Hon Teng Limited’s (HKG:6088) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, FIT Hon Teng’s P/E ratio is 13.98. In other words, at today’s prices, investors are paying HK$13.98 for every HK$1 in prior year profit.

See our latest analysis for FIT Hon Teng

How Do You Calculate FIT Hon Teng’s P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

Or for FIT Hon Teng:

P/E of 13.98 = $0.46 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.033 (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 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 Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

FIT Hon Teng saw earnings per share decrease by 13% last year. And over the longer term (5 years) earnings per share have decreased 2.1% annually. This could justify a pessimistic P/E.

How Does FIT Hon Teng’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, FIT Hon Teng has a higher P/E than the average company (8.2) in the electronic industry.

That means that the market expects FIT Hon Teng will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.